Does This Market Have Bad Brea(d)th?

Some folks reported earnings on Thursday afternoon.

Perhaps most notably, these folks:

  • AMAZON 1Q EPS $1.48, GAAP EST. $1.08
  • ALPHABET 1Q EPS $7.73, GAAP EST. $7.42

As it turns out, those guys are represented pretty heavily at the index level (who knew?).

Now personally, I don’t give a shit what individual companies report. Regular readers are acutely aware of that. I’m a macro guy – through and through.

And to be honest with you, I think that’s undoubtedly the best kind of guy to be.

You can’t take a holistic view on markets if you’re trying to parse earnings calls. Someone out there thinks that’s naive. Well, that someone is wrong. Because do you know what? If Marine Le Pen were to somehow pull a second round win out of her (anti-Semitic ) ass next month and put redenomination risk back on the table in France, none of those earnings calls are going to make one shred of difference when the biggest sovereign default in the history of the world comes calling.

But before I get off track, the reason I bring this up is because Goldman is out with a pretty interesting note on Thursday which, in light of the earnings deluge this afternoon, is probably worth highlighting.

You can read the excerpts below, but it can basically be summarized as follows: while you might think this market has bad breath breadth, it’s not as odorous as it seems at first smell..

Via Goldman

One reason investors express concern is the growing impact of the largest companies on the aggregate US equity market. The share of S&P 500 index market cap accounted for by the 10 largest firms has steadily risen in the last two years. After reaching a nearly 20-year low in 2015, the 10 largest S&P 500 firms today account for 20% of index market value. Some investors worry that the index’s earnings and price rely too heavily on a small number of companies, making the broad market vulnerable to a potential shock suffered by one of those firms. In absolute terms, however, the level of “density” remains below the average of the last few decades as well as the 22% share reached in 2012.


Another way to quantify breadth is examining the contribution of companies to the index return. Year to date the top 10 contributors have combined to account for 37% of the S&P 500 index return (more than double their market cap representation of 17%). The concentration among the top five is even greater, with those firms – AAPL, FB, AMZN, GOOGL, and MSFT – accounting for 28% of the return and 12% of market cap.


Our Breadth Index (“GSBI”), tracks this dynamic – the degree to which index returns are driven by a broad-based rally or narrow slice of the market – over time. This index shows that the current dynamic is typical. The GSBI runs on a scale from 0 (narrow breadth) to 100 (wide breadth) and currently stands at 58, above the 30-year average of 35.


A third common way to measure market breadth is by examining the proportion of companies trading above or below recent prices. Advance/decline indices, which count the number of stocks rising and falling, are among the simplest variants of this approach. Exhibit 6 shows the NYSE cumulative advance/decline index, which is currently at a record high, demonstrating broad-based strength.

One particularly useful version of the approach based on price levels is to compare the distance between the current price and 52-week high of the S&P 500 index vs. that for the median index constituent. When the index is much closer to its 52-week high than the median stock, this breadth measure becomes very negative and signals that a small number of stocks are sustaining the index level. This metric’s current reading also shows that S&P 500 breadth is above its historical average (Exhibit 4).


More than the level of market breadth, changes in market breadth can be warning signs about near-term equity market returns. Sharp declines in breadth occur relatively infrequently. When they do, however, the S&P 500 tends to post below-average returns during the subsequent 1-, 3-, and 6-month periods. Here specifically we quantify sharp declines in breadth as instances that the 52-week breadth declines by more than 5 percentage points during a 12-month window. As shown in Exhibit 5, this has occurred eight times since 1980, most recently in January 2016. The index also tends to suffer larger-than-average drawdowns following sharp declines in breadth. See Exhibits 7-8. During the last 12 months, however, breadth has risen.




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