You Take My Breadth Away: Market’s Underlying Deterioration

The stock market could use some mouthwash. Breadth in the S&P 500 remains fresher than either the NASDAQ or Russell 2000, but it’s also been deteriorating. Generally, market breadth indicators highlight the percentage of stocks in an index trading above moving averages; or the number of stocks rising relative to the number that are falling—often incorporating volume statistics as well. An analogy often used to explain why breadth matters comes from the battlefield. When the generals are on the front line; but the soldiers are lagging behind, the force is less powerful than when the soldiers are on the front line alongside the generals.

Let’s start with a very broad look at breadth. As shown in the chart below, although the S&P 500 traded at an all-time high as recently as last week, the cumulative advance/decline (A/D) line for the broader NYSE universe peaked on June 11 this year. The divergence between the two looks similar to early-September last year—the point at which it was mostly the “big 5” stocks within the S&P 500 (the “generals”) that had powered the S&P 500 to its September 2, 2020 high.

NYSE A/D Struggling

Source: Charles Schwab, Bloomberg, as of 8/20/2021. Cumulative advance/decline (A/D) line is the cumulative sum of the daily difference between the number of stocks on the New York Stock Exchange (NYSE) advancing and declining in a single day.