We're in that part of the cycle where the folks who trade only the big-cap indexes think everything is hunky dory and are making fun of anyone who thinks fretting over the breadth of the market is worthwhile.
We're at that part of the cycle where we get the "who needs breadth when we have Nvidia (NVDA) ?" We've been here before, and I can tell you it lasts longer than it should. We have looked at 1999 when it lasted well over a year. Oh, sure it was more widespread breadth-wise then, but similar in some respects.
We saw it in 2021, as well. And I can tell you the same folks who scoffed at the poor breadth in 2021 because we had the FANG stocks that pushed the S&P up 20% thought the world was great. When did they turn bearish on stocks, you wonder? When did they finally realize we were in trouble? Oh, right around 4100 on the S&P 500. Basically last May.
So you have to pardon me if I don't share their view that it's OK for the market to be narrow. Actually it is OK for it to be narrow. It's not OK for it to continue for months on end. By some measures it's been like this since April-the divergence. On the chart below you can see that the February high in the S&P (brown) and in breadth (blue) had the same shape as they made a high and corrected.
Even off the March low they had a similar shape, with a nice rally. It is only since April that the S&P has gone sideways while breadth has gone down.
I have been hopeful that breadth would play catch up. I have been hopeful that they were down so much already it was their turn to get some love. But we have only had a one day wonder here and there and then it's right back to the divergence.
But I am here to tell you that this sort of divergence can go on for a long time. Here is the McClellan Summation Index for 2021. Do you see that downtrend? Now look at the lower panel since that is the S&P 500.
It's fine to say breadth doesn't matter -- because you can see in 2021 it didn't -- until it did. But do not all of a sudden turn bearish after the S&P is down 10% or more only to turn bullish when it's 4100 again. Why? Because then you are just chasing your tail. And you're saying breadth really does matter only you figured it didn't. By the time they turned bearish most stocks were down 50% or more.
Now, aside from that rant, we did get a bout of volatility and now the Daily Sentiment Indicator (DSI) for the VIX is back at 28, so there is some breathing room. And we did get some of those way overbought groups to see some selling.
I know everyone will be breathless over technology on Thursday, but in the days ahead I will be focused on the Dow Jones, because it has only had four green days in the whole month of May and it is at its 200-day moving average line. I expect it will be oversold within the next several days.
