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SPX rallies, but market breadth remains mixed

During 2021, the stock market shows significant strength, at least from the perspective of establishing new all-time highs. The large-cap indexes (i.e., SPX and NDX) dominated overall market performance. However, by year-end, internal cracks appeared below the surface.


Technology-laden and growth indexes such as COMPQ and NDX peaked in Nov 2021. Two months later, in Jan 2022, the rest of the stock market peaked (i.e., SPX, INDU, NYA, etc.).


Last year (2022), everything fell. Nothing was immune to the broad bear market selloff, with the mega-cap names, including growth stocks and mega-cap technology stocks plummeting.


From the Oct 2022 lows, prices and market breadth readings bottomed. SPX, INDU, COMPQ, NDX, and other stock market indexes have rallied, primarily from the strengths of a few mega-cap names.


Is the recent stock market rally sustainable if market breadth readings have not expanded over the past 8-months?


Key market breadth indicators appear to be nearing critical junctures of their respective rallies as SPX nears pivotal intermediate-term resistance at 4,325.28 (Aug 2022 reaction high).


Some technical indicators hint at a favorable outcome (impending technical breakout). Other indicators warn of an SPX peak and an impending correction. The mixed readings warn of another battle between the bulls and bears.


Positive readings include the potential for a large head/shoulders bottom pattern breakout in the advance minus decline market breadth indicator. A breakout above neckline resistance finally confirms intermediate-term breadth expansion.


Negatives include a potential Nov 2022 head/shoulders top pattern in the RSP ETF. SPX equal weight ETF remains another proxy for market breadth or market internals. The negative divergence between SPX and RSP again warns of a few mega-cap SPX names driving the overall SPX performance.


The % of SPX stocks trading above 200-day ma (52.60%) and % of SPX stocks trading above 50-day ma (49.20%) continue to struggle to breakouts. Nonetheless, the two indicators near the top of a symmetrical triangle (50-day ma) and the top of the falling wedge (200-day ma). Confirmed breakouts would greatly help SPX with its price breakout above 4,325.28.


Another technical scan of SPX stocks trading above 50 and 200-day moving averages shows only 186 SPX stocks (or 37.2% of the total SPX) currently in an intermediate-term uptrend. It will be tough for an SPX intermediate-to-long-term uptrend to sustain without market breadth broadening.


As investors have painfully learned from history, SPX price rallies without participation from market breadth indicators and robust sector rotations warn of market tops. Although a handful of mega-cap stocks can still power SPX higher over the near term, this rally will likely fade without greater participation from the broad marketplace.


Source: Chart courtesy of StockCharts.com


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