Narrowing market breadth worrying signal for global stocks

Investors are scrutinising the stock market’s narrowing breadth and other signs of ebbing risk appetite, as markets digest a hawkish pivot from the Federal Reserve, soaring inflation and concern over a fresh wave of Covid-19 cases.

Only 31% of stocks in the tech-heavy Nasdaq are trading above their 200-day simple moving average despite the index’s 18% year-to-date gain, according to Refinitiv data, the lowest level in at least a year. That number stands at 36% for the small-cap-focused Russell 2000.

Stocks in the S&P 500 are faring better, with 68% of constituents trading above that moving-average mark. Still, just five stocks - Apple, Microsoft, NVIDIA, Tesla and Alphabet - have accounted for about half of the index’s gain since April, data published by Goldman Sachs earlier this week showed. The S&P is up about 24% for the year and stands near record highs.

Narrowing breadth can presage a period of rocky trading, with deeper-than-average drawdowns and weaker overall returns, Goldman’s data showed. The bank’s analysts said declines may be limited this time around by factors such as strong corporate earnings and a market that may have already priced in a more hawkish Fed.

Others are less sanguine, AE Wealth Management Chief Investment Officer Tom Siomades, believes investors should brace for more market volatility.

Published in The Express Tribune, December 19^th, 2021.

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