The Stock Market Is Suffering From Bad Breadth
Comment of the Day

December 23 2021

Commentary by Eoin Treacy

The Stock Market Is Suffering From Bad Breadth

This article from Bloomberg may be of interest to subscribers. Here is a section:

The problem for money managers is that when the returns of the market are being driven by a handful of stocks, they must own those stocks or risk underperforming the market, which creates continuous demand for those stocks that are leading the market higher no matter what their prices. And it was clear during the small correction late last month that so-called market neutral players had been using Apple, Microsoft and Nvidia as a hedge, because as the market declined, those stocks actually rose, as hedges were unwound.

There have been episodes of declining breadth in the past, and those usually presage large corrections or bear markets. The Nifty 50 episode in the 1960s is one example. But even in the dot-com bubble, breadth declined steadily until March of 2000, at which point there was only one stock standing: Cisco Systems Inc. When Cisco broke on an earnings report, that was it for the dot-com bubble.

Eoin Treacy's view

This talk of declining breadth has been pervasive over the last month and has led to a great deal of hand wringing among market participants. At least part of the reason for that has been the significant underperformance of the “innovation” stocks relative to the mega-caps. These were sold on the basis of being the next big thing a year ago and have significantly underperformed in 2021.

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