As first quarter earnings season continues, the stock market has seen broad momentum (^DJI, ^IXIC, ^GSPC). But the breadth is showing signs of worsening, raising questions about what this means going forward. Yahoo Finance’s Julie Hyman digs deep to analyze market breadth trends.
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Video Transcript
Stock prices are showing strong performance.
But there has been a slight change in this story over the past week.
What does this mean for investors?
Julie Hyman has the answer and she approached us.
Look, Julie.
Thank you, Josh.
We’ve been talking a lot about breathing, you know, we talked about it earlier.
Well, an hour ago as we were speaking with CLI, you know, some of the big tech stocks were driving a lot of the gains.
My breath started to get short again.
But if you look at this chart provided by Bespoke Investment Group, you can see that his breathing was starting to deteriorate: And this was just a week ago.
Shown here in blue is the S&P 5 index.
Next, shown in purple, is the cumulative up-down line for a given day. How many stocks are rising and how many are falling?
We’ve also seen a big gap between these two lines over the last week or so, which suggests that breathing is once again deteriorating a bit, although this may not be as widespread as the moves we’re seeing in the stock market.
That probably wouldn’t be considered a very good sign.
Another way to potentially look at this is to look at the S&P 500 Equal Weight Index.
We see that it has increased by 3.4%.
year to date.
The decline is notable when compared to the S&P 500 itself, which is up almost 10% year to date.
Here is another perspective when considering respiratory metrics and what they mean.
Josh.
So, Julie, bring on your crystal ball.
What does this mean for what happens next?
So, according to the folks at Bespoke, they also point out that traditionally, it’s not necessarily seen as a good sign.
Looking at the past 10 days, 83 stocks have fallen per day, which is quite low historically and a very bad sign of running out of steam.
But they say what is commonly seen is what’s known as regression to the mean.
In other words, stocks and shares are spreading out again and tending to move in the same direction, which could lead to stronger future returns as laggards catch up.
This is what regression to the mean means.
Such a variance is unusual.
Therefore, when the two stocks start moving in tandem again, the catch-up effect will drive up stock prices.
History shows that it can happen, they say.
