Why it’s good news that most stocks are falling
And it’s not because when shares go down buyers can get more at a lower price.
Some good news for the stock market: a ton of stocks have been going down.
Yes, you read that right. And I don’t mean this in the Warren Buffett-esque sort of way, where buyers of stock should be happy when shares go down because they can get more at a lower price.
But rather, it’s about what the sharp deterioration in market breadth has historically meant for future performance. Over the past two weeks, many more members of the S&P 500 have been falling rather than rising each day.
Case in point: at the headline level, the S&P 500 has made fresh record highs or fallen no more than 1.5% off those levels since May 17, but the share of its constituents trading above their 50-day moving averages has tumbled from about 65% to 38%. In other words, a small number of heavily weighted stocks *cough* Nvidia *cough* were doing the heavy lifting keeping the benchmark index in rarefied air.
This breakdown in breadth typically bodes well for forward returns, according to analysts at Bespoke Investment Group. Heading into Thursday, the 10-day market breadth (measured by the number of stocks advancing less declining) was in the bottom 10% of readings going back to 2002, they note.
Breadth this poor has actually been the most positive setup for forward returns over this span, per Bespoke.
“Low breadth readings (bottom decile) actually lead to stronger forward returns as upside mean reversion typically occurs; the bottom decile (where breadth currently sits) is the strongest-performing decile of the bunch across the next day, week, month, 3 months, 6 months, and year,” the analysts write.
Market breadth has improved meaningfully on Thursday. As we enter the last hour of trading, 9 of 11 sectors are positive and more than 350 members of the S&P 500 are positive. But that’s not translating to gains at the index level because of a big selloff across tech stocks. Effectively, the price action Thursday is the exact opposite of what’s been happening for the past two weeks.
