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Are Soldiers not following the Leaders?

A good analogy for the stock market is markets are like armies composed of generals (leading large-cap stocks) and soldiers (the rest of the index).

What is the market breadth? How does market breadth affect the stock market?

Rising or expanding market breadth or advance-decline line suggests the Soldiers (majority of stocks) are following the Generals (market-cap leaders) into battle. On the other hand, declining or contracting market breadth warns of the Soldiers not following the Generals into battle. The stock market typically cannot sustain its advance over the long term under this situation.

During the mid-1960s to the early 1980s, investors were conscious of trading ranges as the stock market went nowhere, whipping up and down for sixteen years. Since the market was range-bound, technical analysis was popular among trading professionals.

During this period, market breadth was narrow, as the Generals marched forward without the soldiers or the troops following. Although the stock market generated several short-to-intermediate-term explosive rallies, they all quickly faded.

The Tech/Telecom and bubble of 2000-2002 was another classic example of the Generals (i.e., tech and telecom stocks) marching forward without the Soldiers (i.e., the rest of the market).

It brings us to the current market environment. S&P 500 Index has appreciated a respectable 8.55% on a year-to-date basis. However, large mega-cap companies with a dominant market capitalization in the S&P 500 Index have dramatically outperformed their peers.

AAPL (2.68 trillion market-cap, 7.24% of SPX, and +31% YTD), MSFT (2.27 trillion, 6.56%, and +28%), GOOGL (1.37 trillion, 1.83% and +21.5%), GOOG (1.37 trillion, 1.83%, and +21.4%), AMZN (1.05 trillion, 2.70%, and +21.5%), NVDA (714 billion, 1.96%, and +98%), META (624 billion, 1.53%, and +102%), and TSLA (507 billion, 1.27%, and +31%).

The eight Technology related names collectively account for 25% of the overall SPX Index by market capitalization. While AAPL and MSFT combined contribute over 40% of the S&P Technology sector. Interestingly the above eight stocks also provided over 80% of the overall SPX year-to-date gains.

What is the significance of market breadth concerning the stock market?

So far this year, a narrowed group of SPX stocks, namely the Tech titans, have dominated SPX, COMPQ, NDX, and other market cap weighting indexes.

The contrast between mega-cap tech stocks and traditional growth names has become one of the largest in recent memories. Beneath the surface, a few have skewed the SPX results and masked the overall market weakness this year.

As we learned from history, weak participation or poor market breadth can be sustained over the short term. However, if the market breadth does not expand, this will eventually force the broad market to reset.

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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