Historic SPX Performance Amid Poor Market Breadth

The benchmark is near its highest level since August

Senior Quantitative Analyst
Jun 7, 2023 at 8:00 AM
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The S&P 500 Index (SPX) is up over 10% on the year and near its highest level since August. Few stocks are participating in the rally, however. The chart below shows the SPX along with the percentage of stocks positive over the prior six months.

Despite the index being at six-month highs, less than half of stocks are positive over that timeframe. It is generally accepted that poor breadth is a bad sign for the market. Often when you look at the data, however, generally accepted facts turn out to be wrong. This week I’m looking at the historical data to see if that has been the case with poor breadth at six-month highs.

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Bad Breadth Reeks

For the analysis below, I’m looking at times in which the SPX was within 0.5% of the six-month high. Then I found the percentage of stocks that were positive over the prior six months. Going back to 2010, when the index was near a six-month high, we would expect about 75% of stocks to be positive. Currently, less than 45% of the stocks have been positive over the prior six months. So, has this been a bad sign for the market?

In this case, the prevailing wisdom is correct. When the market has been rallying, poor breadth has led to underperformance going forward. The table below summarizes the six-month returns going forward for the SPX when it was within 0.5% of the six-month high.

When less than 60% of stocks were positive over the prior six months, the index averaged a return of just 0.31% over the next six months, with 59% of the returns positive. Compare that to when 75% or more of the stocks were positive. In that case, the SPX averaged a return of about 5.5%, with 85% of the returns positive. When you look at any time since 2010, the average was 5.43%, with 76% of the returns positive.

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The chart below shows the SPX with markers indicating times when the index was near a six-month high, but less than 60% of stocks were positive during the six months prior. This was the case heading into the top just before 2022 and at the top in mid-2018. There were times, however, where there was still upside going forward. This means there is hope, at least.

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