Monday, November 16, 2015

Market Breadth.........ANOTHER PESKY FACT!

Market Breadth

Market breadth has been a recent topic of investor discussions.

The Goldman Sachs Breadth Index (GSBI) to track market breadth. The index utilizes S&P 500 constituent weights and 6-month returns to assign a market breadth value between 0 and 100. Readings below 5 indicate that market breadth is especially narrow. SEE CHART BELOW.

There are many similarities between the current low breadth environment and the narrow breadth regime that emerged during the tech bubble in the late 1990s. A narrow market exists when a few stocks drive the majority of the index-level return. 

Five firms – AMZN, GOOGL, MSFT, FB, and GE – totaling 9% of the equity cap of the index have accounted for more than 100% of the S&P 500 YTD return. Stated alternatively, without these stocks the index would have posted a 220 bp lower total return or -2.2% YTD.

The Breadth index currently equals 1, one of the lowest levels in the 30- year series.

The Breadth index has stayed below 5 for at least two consecutive months just 11 times since 1985. The typical episode lasted four months, with past episodes ranging from two months in 2007 to a high of 14 months during the tech bubble. The current exceptionally narrow breadth period is just one month old but is on track for a second month, so this environment could reasonably be expected to persist into early 2016.

Investors are rightly very nervous because with just 5 stocks (!) propping up the entire market, the party is set 
to end with a very painful bang,especially for the small and mid-cap momos. And, as the action on Friday confirmed, the "market" is finally getting the memo.

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