Breadth Bombs
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.
