This Market’s ‘Bad Breadth’ Is Getting Worse, And Worse, And …

Last Saturday, we noted that this market’s “bad breadth” is seemingly getting worse all the time.

Breadth is a particularly touchy subject these days, what with investors of all stripes shrieking about how it isn’t a sign of impending doom that the market is being propped up on the strength exhibited by a handful of names.

Of course as we noted in the piece linked above, there are a lot of ways to measure market breadth and so, it’s pretty much impossible to be “right” – or “wrong” for that matter.

But Bloomberg has been pounding the table recently on the extent to which a couple of very simple breadth indicators seem to be signaling that this market is getting increasing thin. For those who missed it, here are a couple of quick excerpts from a piece they ran several days ago and that Bloomberg TV has been talking about since.

Consider a version of the S&P 500 that strips out market-value biases — the “equal-weight S&P,” in which Apple Inc. matters as much as relative pipsqueaks like Garmin Ltd. and Macy’s. Analysts normally like to see the two indexes moving together, a sign the rising market is lifting all boats.

That didn’t happen [last week]. In fact, the equal-weighted version just posted its biggest weekly drop since May, and its worst week versus the regular S&P 500 all year. The reason: while enough megacap stocks rose to keep the S&P 500 afloat, single-stock blowups were far more common than single-stock rallies.

[…]

A similar bias shows up elsewhere. Large-cap stocks have risen six times as fast as smaller companies in the Russell 2000 Index through this week. The advance in mid-size companies is about half the S&P 500.

Well we decided to check back in on market breadth and guess what? It’s still getting worse.

Here’s the S&P versus its equal weighted cousin:

BadBreadth

The equal-weighted index has underperformed the regular S&P for eight consecutive sessions. The last time that happened was in March, and as you can see in the top pane, that’s when the two really began to diverge.

Now have a look at the S&P versus the Russell 2000:

BadBreadth2

Same story. Look at the green bars: the S&P has been habitually outperforming small caps since July 28.

Is this something you should be concerned about?

Well, that depends. We would suggest it underscores the notion that this rally is fragile and rests on an increasingly shaky foundation.

But again, there are any number of ways to measure breadth, and we’re sure someone who prefers those measures is rolling their eyes reading this right now.

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