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Market breadth suggests narrowing rally as S&P 500 hits records By Reuters

Market breadth suggests narrowing rally as S&P 500 hits records

© Reuters. Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 1, 2024. REUTERS/Brendan McDermid/File Photo

By David Randall

NEW YORK (Reuters) – As the has soared to fresh highs, fewer stocks have been participating in the rally, stirring worries that recent gains could reverse if the market’s leaders stumble.

Strong market breadth, or the number of stocks taking part in a broader index’s rise – is often viewed as a healthy sign by investors as it shows gains are less dependent on a small cluster of names.

Market breadth was narrow for most of 2023, with the 24% gain in the S&P 500 driven primarily by the so-called Magnificent Seven, a group of heavyweights that includes Meta Platforms (NASDAQ:), Apple Inc (NASDAQ:). and Amazon (NASDAQ:).

Breadth improved toward year end, yet some measures show it narrowing once again in 2024. For example, while the S&P 500 is up 5.4% and closed on Friday at a record high, the 10-day average of stocks on the New York Stock Exchange and Nasdaq hitting new highs has fallen to its lowest level since July, data from Hi Mount Research showed.

At the same time, only 62% of large-cap stocks stood above their 50-day moving average as of Thursday’s close, down from 87% in December, data from Thrasher Analytics showed. Meanwhile, the Magnificent Seven have accounted for nearly 60% of the S&P 500’s gain this year, according to Dow Jones Indices.

“We are at a historic extreme in the amount of money in this very small number of stocks,” said Michael Smith, a senior portfolio manager at AllSpring Global Investments.

The narrow group of stocks powering the market could make it more vulnerable to swift declines if an earnings disappointment or other issue hits its biggest stocks, said Smith, who owns shares of Microsoft (NASDAQ:), Amazon and Google-parent Alphabet (NASDAQ:).

While most of the megacaps have powered higher this year, shares of Tesla (NASDAQ:) have fallen 22%, the third-worst performer in the S&P 500, demonstrating how quickly the market’s superstars can fall out of favor.

Some investors believe breadth has narrowed partly because markets now anticipate the Federal Reserve will cut rates later in the year than many on Wall Street had expected, forcing an unwind of bets in rates-sensitive sectors that could benefit from lower borrowing costs.

The S&P 500 real estate sector, for instance, is down 4.4% year-to-date due to worries about commercial real…

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