big boys taking over

I keep seeing some fascination with market breadth, the latest being from Barchart.com

This requires context, rather than just saying it is the ‘worst’ this century.

As the description says, it’s the distance between the SPX’s 52 week high and the median constituent’s 52 week high.

If that’s big, the market is considered narrow (only a few stocks are rallying, leading the market higher).

But hang on a second…

Does this matter?

In my view, not really.

If we take the reasoning as to why the current breadth is narrow, it’s largely because of the resurgence of the AI theme.

Microsoft, Nvidia, Meta, Broadcomm and Netflix have all made new 52-week highs in the last two weeks

These are in the top 10 of the SPX constituents.

Unfortunately for the median stock, it clearly just is not part of the blustering AI narrative!

My preferred approach to analysing market breadth is therefore to use a market health score which I’ve sort of invented (market nerds, if this has already been created then please pretend I have invented it)…

But also, this provides the reality of where stocks are by taking the breadth indicator as being the % of stocks above the 50dma rather than Goldman’s weird measure…

Market Health Score = α⋅Index Return + β⋅Breadth Indicator − γ⋅Concentration Ratio

Here is what we found using Perplexity…

Although the top 10 stocks are accounting for 40% of the move, the fact that 72% of stocks are above their 50 daily moving average indicates a VERY healthy market.

Even if you adjust the measures, every metric suggests a very healthy market…

So what is the trading outcome here?

Keep buying, and the biggest risk is only if the AI narrative starts to wane.

Your bet then is based upon looking at the guidance on Nvidia, Microsoft etc and understanding whether they are set to keep retaining their positive earnings growth or not.

That’s literally it.

The other lesson is to stop listening to silly sell side research and media channels that apply zero context.

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