Why do I care so much about the breadth of the market? Why do I care so much about the number of stocks making new highs? None of that seems to matter much these days, right?
Think of the market as an army. There are the generals and the troops. The generals are the big-cap, index-moving stocks. The troops are the breadth of the market. If the troops are not on the battlefield, the generals have to protect themselves. So far they have been doing a fine job of protecting themselves.
They did a fine job of protecting themselves in the early 1970s, too. It lasted over a year where the generals marched on and the troops went home. Unfortunately that ended with a multi-year bear market.
The generals did a fine job of protecting themselves in 1987, too. In the spring of that year the troops left the battlefield and the big cap stocks -- what we called the "OEX" names-marched on for six more months. In August the market made a high, we corrected in September and then rallied again. We crashed in October. But that was the low. We had to grope around quite a bit, but we ultimately ground our way upward over the ensuing years.
In the late 1990s, the generals marched upward for about 18 months, while the troops went missing in action. That eventually ended with a bear market.
That's just the way it has always been. How long can it last? As you can see from the above examples, a long time. How can it correct itself without become ugly? It can do so by getting the troops back on the field. For the last three trading days breadth has been negative. The day days prior to that breadth was barely positive (less than +100 issues) and the day before that breadth was negative. That means that we've basically had negative breadth for the last six trading days.
The positive behind that is when breadth is negative for so many days the market heads toward an oversold condition, or at least breadth does: Think Russell 2000, think down and out, return to work stocks. You can see the "heading toward oversold" in the chart of the Overbought/Oversold Oscillator. These indicators don't fall when breadth is good.
We might also see it in the McClellan Summation Index, which by now you know is heading south. It now needs a net differential of positive 2,100 advancers minus decliners to stop its decline. When it gets to where it needs positive 2,000, it has dipped a toe into oversold territory. At positive 4,000 it is grossly oversold. It doesn't get to these sorts of readings with great breadth, only with crummy breadth.
So, sure we can keep rallying on poor breadth with few stocks making new highs, or we can expand the breadth. The former usually ends in an ugly market. The latter ends in a nicer market. Again, we can dismiss, it all because right now the indexes cruise upward, but history says at some point it matters. I say close the gap, before it has gone too far.