More stocks are joining the market's rally.
Photo: Photo illustration by Emil Lendof/The Wall Street Journal; Photos: iStockHigh-flying technology companies have helped the U.S. stock market claw back most of its losses for the year. Now, other stocks are helping to carry the load.
Some market-breadth indicators have hit new highs this month, a sign that the stock market’s comeback is widening after weeks of concentrated outperformance this spring from large-cap technology stocks. Finally, after brief periods of rotating leadership, a wider-ranging group of stocks is rising in lockstep.
Stocks from Clorox Co. to Eli Lilly & Co. to Danaher Corp. set new highs last week, pulling the S&P 500 up 1.9% and trimming its losses for the year to 4.1%. For investors who found themselves caught in the midst of the choppy trading days, it was a respectable outcome in the face of looming coronavirus uncertainties.
Yet for those who parse the internals of the market, things looked much more optimistic: Technical measures are suggesting that stocks have more room to run in the months ahead.
Signs of market breadth have been expanding lately, and earlier this month, indicators flashed their most bullish sign yet: More than 97% of the stocks in the S&P 500 traded above their 50-day moving averages, a measure that analysts use to track momentum and breadth. That marked a high since at least June 2010, according to Dow Jones Market Data, and almost doubled the percentage of stocks that were trading at such levels in early May.
“It’s staggering,” Brian Levitt, global market strategist at Invesco, said of the indicator’s recent high. “Sentiment shifted so significantly in a very short period of time.”
This week, investors will be watching consumer-spending and new-home -sales data to gauge the pace of the recovery. Earnings reports from companies including Nike Inc. and Darden Restaurants Inc., which operates brands including Olive Garden, will offer further insight.
Technical analysts say other signs of the market’s breadth abound. The NYSE advance-decline line, a popular cumulative indicator that tracks the number of all securities rising minus the number falling on the exchange each day, has risen, recently hitting its highest level in at least two years, according to data starting in June 2018. The S&P 500’s advance-decline line, meanwhile, is edging closer to its February highs, according to Dow Jones Market Data.
At the same time, the equally weighted S&P 500 index—which gives the same weight to both the smallest and largest companies in the index—has been outpacing its traditional counterpart, which is market-cap-weighted and swayed by bigger companies’ performance. The equal-weighted index has risen 2.2% this month and 22% this quarter, compared with the S&P 500’s respective gains of 1.8% and 20%.
Investors who study breadth cite these metrics as evidence of the stock market’s momentum and suggest bigger gains could be ahead. They agree it is important for a greater swath of stocks to participate in a rally, in the event one sector falters.
History shows that when more than 90% of stocks in the S&P 500 rise above their 50-day moving averages—a rare occurrence, according to Ryan Detrick, senior market strategist at LPL Financial—it tends to be followed by a period of gains down the road.
“As devastating as the headlines are right now, we’re seeing the hallmarks that suggest that six or 12 months from now, equity prices could be significantly higher,” said Mr. Detrick, adding that there could be some volatility in the short term. “These historically overbought environments, where we are right now, tend to take place at the start of bull markets.”
To be sure, such outperformance typically only occurs after a violent selloff. The last time that more 90% stocks repeatedly traded above their 50-day moving averages was February 2019, and before that, during the spring of 2016. Both times, the S&P 500 went on to return double-digit gains one year after the indicator crossed the 90% threshold.
Many analysts say they were surprised to see the recovery broaden so quickly, after the S&P 500 plunged 34% in just over a month in February and March. Many have also been amazed to watch traders pile into everything from shares of severely pummeled cruise liners to financially troubled companies, such as Hertz Global Holdings Inc. and Chesapeake Energy Corp.
Many of those moves have been driven by day traders, who have flocked to platforms including Robinhood Markets Inc. that offer zero-commission trades to take advantage of discounted share prices. Some observers have warned that the activity is a sign of a speculative frenzy.
Still, more-stable companies with strong balance sheets have also been lifted by the tide.
Other breadth indicators, including the number of stocks hitting 52-week highs, suggest the market is still in the early innings of recovery. On Friday, for example, only 13 companies in the S&P 500 reached a new high—far lower than the 74 that hit 52-week records the same day last year.
Frank Cappelleri, a market technician and executive director at Instinet, said that measure tends to be a lagging indicator.
“Most stocks are below their highs, as the S&P 500 is as well,” Mr. Cappelleri said. But if the rally does continue and few new highs persist, he added, “that would make me a little concerned.”
Many analysts point out that today’s market is far from typical, and investors face a dizzying amount of information that makes the path ahead murky and the recovery potentially fragile.
Increasing coronavirus infections and hospitalizations in some states might threaten to slow local reopenings. Meanwhile, tensions between the U.S. and China and uncertainty ahead of the November election are also giving some investors pause.
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The sudden selloff in stocks earlier this month, during which the S&P 500 dropped almost 6% in one day, jolted many investors and pulled the breadth indicators off their recent highs. Most measures began to pick up again last week.
Adam Koos, the president of Libertas Wealth Management Group, who monitors several technical indicators, said he believes it is best to use the recent bullish breadth signals as a chance to “pause, wait for things to settle down” and then find entry points back into the market.
“I think it would be careless to be so bullish based purely on historical statistics using breadth thrusts,” Mr. Koos said. “If the market has taught us anything this year, it’s that anything is possible.”
Write to Caitlin McCabe at caitlin.mccabe@wsj.com
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