Is the market out of breadth?

The image that illustrates this article is the hour chart from TradingView on the S&P 500 index.

I am reporting this just to show you how crazy markets can be:

• Last Friday stocks rallied after PCE deflator report was mildly favourable and the University of Michigan’s U.S. consumer sentiment index revealed a +0.5 point upward revision to a 4-month high.
• Today, a flood of economic data inundated investors with reminders that the U.S. labor market is alive and kicking, strengthening the chances of higher interest rates for a longer period.

- THIS IS NOT FINANCIAL ADVICE -

I had already commented how bullish the market was. The S&P 500, specifically, is up around 16% since January, and testing higher highs.

In the beginning of 2023, I wrote an article detailing the profitability of the S&P 500 . At that point I bought S&P 500 and kept it as a medium term investment.

Currently, despite the S&P 500 overall positive return, the median stock is down -0.2%. This means more stocks in the index are down than up.

Such performance is happening because the S&P 500, like most major market barometers, is weighted by market capitalisation. Essentially, the bigger a company is, the more room it takes up in the index.

The top 10 stocks in the S&P 500 account for 30% of the index.

Apple and Microsoft, which together account for 14% of the S&P, have each returned 32% in 2023. Third-largest firm Alphabet is up 39%. And No. 5 firm NVIDIA has made and astonishing 110% return. Common sense will tell you this is dangerous.

At this point, the breadth indicator for the S&P 500 is telling us that we might be on a shakier ground.

Most of the stocks in the S&P 500 are struggling. This might suggest some fragility in this year’s bull market. For the second half of the year the index can be pressured by recession risks and downward earnings revisions.

Does this means you should sell or open a short position? Not necessarily.

This means you must keep your eyes on the news and on financial reports, diversify your investments and, above all, don't panic!