In recent months, we’ve witnessed a significant rally in the S&P 500, driven predominantly by a few key players. While the market has been moving higher, the number of stocks participating in this rally (market breadth) has been trending downwards. This article aims to shed light on the underlying Market Internals at play and help individual investors navigate these complex market conditions.
The Influence of Market Heavyweights
Today, 20% of the S&P 500 is comprised of three companies: Apple, Nvidia, and Microsoft. These three giants have posted remarkable returns over the last few months, serving as the primary drivers of the recent S&P 500 rally. This concentration raises questions about market breadth and its implications for the overall market stability.
Weak Market Breadth: Cause for Concern?
Despite the impressive performance of these major stocks, less than 50% of stocks within the S&P 500 have been moving higher over the past 50 days. This weak participation has led many to speculate that the market is on the brink of a significant downturn.
Investors’ concerns about weak market participation stem from the increased vulnerability it creates. A broad-based rally, where many stocks move higher, establishes a solid foundation. Conversely, when fewer stocks are participating, the foundation becomes fragile, making the market more susceptible to sharp reversals.
Market Breadth: Lessons from the Past
To understand the potential risks, it’s helpful to look back at previous market cycles. For example, during the initial stages of the 2010-2011 rally, over 90% of S&P 500 stocks were moving higher. However, as the rally continued, the number of participating stocks dwindled, eventually leading to a rapid 20% correction in the S&P 500.
A similar pattern occurred in 2014-2015. Initially, many stocks participated in the rally, but over time, participation decreased. This decline in market breadth preceded a nearly 15% correction in the S&P 500.
Not Always a Precursor to Doom
However, it’s essential to recognize that weak market participation doesn’t always spell trouble. The bull market of 2017 is a prime example. Throughout that rally, there were periods where only about 50% of stocks were moving higher, yet these phases were often brief, with market participation eventually recovering.
We saw a similar scenario in 2021. In July of that year, less than 50% of stocks were participating in the rally. Despite this, the S&P 500 experienced only a minor correction of about 2% before continuing its upward trajectory as participation expanded.
Current Market Breadth
In 2024, market participation started to degrade in January. This trend could persist until the end of the year, with the stock market potentially continuing to rise during this period. To understand whether this rally will persist or reverse, we must examine the components driving the market higher.
Microsoft, the largest component of the S&P 500, has been in a strong uptrend since 2023. The stock recently broke out above a resistance level formed between March and May 2024, suggesting further upside potential.
Apple has similarly broken above a significant consolidation range it’s been in since 2022, indicating room for more gains. We recently issued a buy alert for Apple to our members following this breakout.
Nvidia has been one of the strongest performers over the past few years, maintaining a robust technical uptrend. Betting against the market today would also mean betting against Nvidia’s strong upward momentum.
Riding the Bullish Wave of Apple, Microsoft, and Nvidia
In the short term, Apple, Microsoft, and Nvidia appear unstoppable. Attempting to short the market now is akin to fighting these strong uptrends. As we’ve mentioned since the S&P 500 broke out in December 2023, it’s crucial not to fight the trend.
The short-term uptrend in the S&P 500 is extremely aggressive. The index recently broke above a key level we’ve been monitoring, suggesting it could reach our 6,000-point target set when the S&P 500 initially broke out of its large basing pattern in 2023.
Despite the strong rally driven by a few stocks, some critical areas of the market are showing signs of deterioration, indicating a weakening US economy. The transportation, consumer discretionary, and financial sectors have all underperformed recently, suggesting the market may be approaching a long-term peak.
Conclusion
This is one of the most challenging environments for traders and investors due to significant economic and valuation risks. If you’re not exposed to the right market areas, you risk being left out. Understanding market participation and focusing on key drivers like Apple, Microsoft, and Nvidia is crucial in navigating these turbulent times. While the short-term uptrend remains strong, staying vigilant and adaptive will be essential as we move forward. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
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