Breadth Not As Strong As Advance-Decline Suggests

In several recent blog posts and weekly Bull Bear Reports, we discussed our concern over the narrow breadth of the rally in 2023. To wit:

“The A.I. chase is making for a very narrow market. As Bob Farrell once quipped:

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

Breadth is important. A rally on narrow breadth indicates limited participation, and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give the rally credibility. A rally that “lifts all boats” indicates far-reaching strength and increases the chances of further gains.”

As we noted then, we can visualize the outperformance of the mega-capitalization stocks by looking at the spread between the market capitalization and equal-weighted indices.

The following chart underscores the remarkable year-to-date outperformance of the unweighted Nasdaq versus the equal-weighted Index. This NDX > NDXE spread is now +11% on the year, by far the widest spread over any 4.5 month period in the last 18 years.”

The chart is updated through the end of May and shows the full 5-month historical differentials. That spread is now the largest on record at more than 15%.

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