A frequent point of discussion this year has been breadth, or more specifically, the massive impact of mega caps on the market-cap-weighted S&P 500’s year-to-date performance (something we discussed in yesterday’s update of our Sector Weightings report). We often use the 10-day advance-decline (A/D) line to measure how breadth is evolving in the near term; highlighting these readings for the S&P 500 and its eleven sectors daily in the Sector Snapshot.  This indicator essentially shows the average net percentage of daily advancers versus decliners in an index over a two-week period.

In the chart below, we show the S&P 500’s 10-day A/D line (expressed as standard deviations to clarify overbought/oversold levels) over the past year. The past week has seen a monumental shift in breadth. Just one week ago, the 10-day A/D line was deeply overbought sitting 1.72 standard deviations above the historical average, but as of yesterday’s close, it has fallen all the way into oversold territory; a 2.9 standard deviation drop in only four days.

Looking back to the start of our data in 1990, that is one of the largest four-day declines on record. In fact, the last time the line fell by such a degree or more was in September 2022 when there was a record decline.

While two-standard deviation declines have been uncommon, even fewer have resulted in the 10-day A/D line going from overbought to oversold.  In the table below, we highlight those nine prior instances that have occurred with at least 3 months having passed since the last occurrence.  The current period holds one of the higher starting readings in the 10-day A/D line. In fact, only November 2011 saw a higher reading.

As for S&P 500 performance going forward, returns have generally been mixed.  One week after big ‘breadth bombs’ the index has actually risen better than three-quarters of the time, however, one month out has averaged a decline with positive returns less than half the time.  Three months out to one year on have all averaged positive returns, but those are all weaker than the norm.

Please click the thumbnail image below to view today’s Daily Sector Snapshot.

The past few weeks have seen a boom in merger and acquisition news. For starters, what was approaching a two-year-long process of Microsoft (MSFT) buying Activision-Blizzard finally went through in what would be one of the largest M&A deals of the past five years and the largest in Microsoft’s history. On top of that, there have been a number of new announcements this month, primarily in the energy space. Earlier this month Exxon Mobil (XOM) proposed a $60 billion bid for Pioneer Natural Resources (PXD), and Chevron (CVX) followed suit today with a $53 billion bid for Hess (HES). Additionally, while nothing is official yet, last week there were reports that Marathon Oil (MRO) and Devon Energy (DVN) have been in talks.

In the charts below, we show the pending counts and nominal dollar values of M&A deals by month over the past decade.  As shown, the past few months have seen the number of deals ramping up with a record amount of activity based on dollar values. Perhaps more impressive has been the dominance of the Energy sector in these M&A announcements.  As shown in the second chart below, they have accounted for over 80% of the value of these deals, the highest amount of the past decade.

After a lower open to start the week, stocks have staged a pretty big intraday recovery (so far).  One catalyst for the rally was a tweet by Bill Ackman saying his firm had covered its Treasury short, citing too much geo-political risk and an economy weakening faster than current economic data suggests.  Why a weaker economy would spur a rally in stocks is a legitimate question, but we’ve all certainly seen stranger things in the market, and when markets become oversold, sometimes it doesn’t take much to spark a rally.  Monday’s rebound also coincided with the Nasdaq’s decline from the July closing high crossing the 10% threshold, and it’s not uncommon for an index in the midst of a decline to bounce at these round numbers as they are where bargain hunters will look to deploy some dry powder.

The Nasdaq is no longer officially in correction territory as we write this (10%+ decline from a closing high without a 10% rally in between), but we wanted to take this opportunity to look at historical trends for past Nasdaq corrections and see how the current period stacks up.  For starters, since hints of the current rate hiking cycle began, there have been four prior Nasdaq corrections.  Three of the four were deep with declines of more than 20%, while the most recent before the current period was more tame at just 11%.

Looking at Nasdaq corrections from a longer-term window, the scatter chart below shows corrections in terms of their magnitude (x-axis) and length (y-axis).  Overall, the median decline of corrections since 1971 has been a drop of 16.6% over a median length of 61 calendar days.  Through today’s close, the current decline is only around 10%, so it’s been a lot milder, but at 96 days, it’s already been 57% longer than the typical correction.  If the current decline in the Nasdaq were to reach the median level for a correction, that would take it down to just below 12,000.

The Nasdaq is known for being more volatile than the S&P 500, and when it comes to corrections, they have tended to be steep as opposed to gradual.  Even with respect to the corrections during the current rate-hike cycle, three of the four prior ones were shorter than the current period.  The only one that was longer lasted 115 days from 11/19/21 through 3/14/22.