Market Breadth: Still Waiting for a Genuine Broadening

Leadership in this market has been elusive, with sectors and stocks gaining and losing favor on a daily basis. Just consider how often leadership has changed: we've loved and then hated banks, industrials, soft goods, and even FANG stocks. What's working? A motley crew of utilities, real estate investment trusts, oil and oil service stocks, domestic companies with no Chinese inputs, finely honed upside surprises, and takeover targets. But is this enough to sustain an advance?

The strategist argues that the market has not yet broadened enough to maintain a sustained rally. We've had a few up days, but the action tells us that it's not enough. Let's dive into why the market remains too fickle for a genuine broadening.

First, consider the takeovers. While we've seen a return of Merger Monday, many deals face hurdles. The T-Mobile (TMUS) and Sprint (S) merger, for instance, looks dead on arrival due to antitrust concerns. This has hurt tech stocks and suppliers alike. However, a handful of deals have real impact on their sectors, such as Marathon Petroleum (MPC) buying Andeavor (ANDV), Marriott Vacations Worldwide (VAC) acquiring ILG, and Prologis (PLD) merging with DCT Industrial (DCT). These deals create value for shareholders and justify stock ownership, but they don't provide leadership on their own.

Second, we've seen some positive action in utilities and real estate investment trusts (REITs), with the latter boosted by the DCT deal. These sectors are a sign that the ten-year yield may not go above 3%, potentially providing some lift to stocks with yields above 3%. However, these are only two small groups, and they're not enough to sustain a rally.

Third, oil stocks have been moving without oil itself, driven by stronger demand and geopolitical tension. However, these stocks appear extended, and the futures curve is outrageously low, suggesting that the long-term outlook is uncertain.

Finally, upside surprises have been few and far between, and even those in tech mean little in this market. The strategist believes that there just aren't enough of these surprises to save the tape, especially as the market grows more negative with each "bullish" day.

To support the strategist's argument, let's examine some market breadth indicators:

1. Advance-Decline Line (AD Line): This indicator plots the difference between the number of advancing and declining stocks. A rising AD line indicates broad market participation in an uptrend, while a falling line suggests a decline with broad participation. In this market, the AD line has been volatile, with no clear uptrend, suggesting that the market has not yet broadened.
2. Arms Index (TRIN): This indicator compares advancing and declining stocks' relative strength to their respective volumes. An index value below 1 typically suggests bullish sentiment, whereas a value above 1 may indicate bearish sentiment. In this market, the TRIN has been oscillating around 1, with no clear trend, suggesting that the market remains uncertain.
3. AD Percentage: This indicator calculates the percentage of stocks trading above a specific moving average. A high percentage can suggest a strong bullish market, while a low percentage indicates a bearish market. In this market, the AD percentage has been relatively low, suggesting that the market is not yet broad-based.

In conclusion, the strategist doesn't see a market broadening yet. While there are some positive signs, such as takeover activity and sector-specific performance, these are not enough to sustain a rally. Market breadth indicators, such as the AD Line, TRIN, and AD percentage, suggest that the market remains uncertain and fickle. To maintain a sustained advance, the market needs to broaden its participation across more sectors and stocks. Until then, investors should remain cautious and selective in their investments.