Key facts
- Market breadth is deteriorating as major stock indexes hover near record highs.
- Fewer than 25% of S&P 500 stocks are trading above their 50-day moving averages.
- Fewer than 45% of S&P 500 stocks are trading above their 200-day moving averages.
- This breadth divergence is the worst on record for the S&P 500 near all-time highs.
- Similar divergences have historically preceded market peaks and a near-term downward bias for stocks.
A rare technical signal in the stock market, characterized by deteriorating market breadth despite major indexes hovering near record highs, suggests the current bull rally may be approaching its peak, according to analysts at Ned Davis Research (NDR).
NDR's analysis shows that while the S&P 500 is less than 2% from its all-time high reached in August, fewer than 25% of stocks within the index were trading above their 50-day moving averages in the past week, and less than 45% were above their 200-day moving average. The firm described this as the worst-ever market breadth for the S&P 500 when the index is this close to its record levels.
Historically, such divergences between stock prices and market breadth have occurred only a handful of times since 1980. NDR screened for instances where fewer than 35% of S&P 500 stocks were above the 50-day moving average and fewer than 50% were above the 200-day moving average, with the index itself less than 3% from record highs. Several of these instances, including September 2014 and November 2021, preceded bull market peaks.
NDR strategists Ed Clissold and Thanh Nguyen stated that market tops are typically preceded by breadth divergences and that they take such technical warning signals seriously. They noted that the current situation could indicate underlying trouble masked by mega-cap stocks. While they are currently giving the bulls the benefit of the doubt, they suggest reducing equity exposure if these divergences persist through year-end rallies, anticipating a potential topping process.
Strategists at HSBC also commented on the situation, noting that while US stocks have remained buoyant, declining market breadth amid a sharp spike in bond yields attests to "severe damage under the hood" in the stock market.