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Market Breadth Update

The market generated some wild fluctuations last week, at least below the surface. The mega-cap technology-heavy Nasdaq 100 Index (NDX) and the broader-based large-cap S&P 500 Index (SPX) ended up at the end of last week. However, the dramatic outperformance in NDX is quite noticeable compared to the underlying stocks in the NDX index and across broader market indexes.


Is the disconnect between NDX and other indexes signaling another investment shift toward the mega-cap Technology growth names into the end of the year?


Is this divergence in market breadth suggesting selective buying, at least from a near-term perspective?


Although the U.S. economy and financial markets remain resilient with a 1-plus month into the end of the year, investors found reasons to worry. They continue to fret about rising inflation, fearful of the high valuation in stocks, concern about the spread of the COVID-19 delta variant into the holiday season, and uncertainties concerning Biden’s $2 trillion social and climate bill.


The stock market continues to climb the wall of worry this year as the stock market rise higher in front of a host of economic, political, geopolitical events, and other concerns. The resilience of the stock market’s rally reflects investors' confidence in resolving outstanding issues since stocks are forward-looking.


The market's ability to climb the wall of worry often occurs during three specific market conditions – at the end of a bear trend, near a market peak, and during periods of sharp market gains.


Market pundits tend to confuse the investment public by issuing dire warnings and dire economic forecasts. Since investors are humans and emotional creatures, they find reasons to worry. The reasons may be real or imaginary. However, it often depends on an individual's perception of the marketplace, personal investment goals, and individual risk tolerance levels. How an investor responds to these uncertainties translates into the willingness of the individual investor to take on various levels of risks.


Technical speaking, the perception remains the byproduct of the emotional aspect of investing. It tends to be unstable and can change rapidly. What causes markets to trend higher has nothing to do with perception. The market's ability to rise depends on the dominant and prevailing trend in the marketplace.


Newton's first law of motion describes inertia as a trend that states that an object in motion will stay in motion unless acted on by an external force. Market internals such as market breadth indicators remains an excellent technical tool to confirm market inertia, direction, and most importantly, the sustainability of market trends.


Market breadth offers an unbiased assessment of the internal health of the market regardless of the overall price. Such information may not be easily detectable by watching a price chart alone. Whether the market breadth is expanding or contracting can help decide if the uptrend is sustainable or short-lived.


With the above thoughts in mind, attached are the advancing minus declining issues market breadth indicators for popular stock market indexes, including SPX, INDU, NYA, COMPQ, NDX, MID, and SML.


In summary, market breadth remains a crucial technical indicator to evaluate the sustainability of a trend. Expanding market breadth reflects broad participation in the market, which leads to a sustainable and longer-lasting uptrend (rally). A review of the market breadth indicators for major US equity markets suggests bullish market internals, at least for the intermediate-to-longer term. However, shorter-term divergence in stock market indexes can also signal investors and traders are increasingly stock selective into the end of the year.


Source: Courtesy of StockCharts.com


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