Stocks: Advance or Retreat?
Kiplinger's Personal Finance|July 2020
Amid the market chaos, investors can gauge whether a rebound will last by looking at market breadth.
Ryan Ermey
Stocks: Advance or Retreat?

THINGS GOT GLOOMY FOR INVESTORS FOR a while. Between February 19 and March 23, stocks in Standard & Poor’s 500-stock index took a Wile E. Coyote– style plunge, losing 33.8% in just a month. Despite uncertainty about the length and severity of the pandemicrelated shutdowns that triggered the sell-off, investors, like the coyote himself, once again grew optimistic, pushing the S&P 500 back up 28.4%. (Prices and other data are as of May 15.)

Lately, the market’s behemoths have been doing the heavy lifting. Just five stocks—Alphabet, Amazon.com, Apple, Facebook and Microsoft—account for 22% of the S&P 500 index’s market capitalization (share price times shares outstanding), a record level of dominance among a handful of companies. So far in 2020, the S&P 500’s five biggest stocks have returned 11.5%, on average. The average loss in the rest: 20.4%. “It’s okay for leaders to lead. But if the market’s generals are headed in one direction and the troops in another, then you have potential problems,” says Willie Delwiche, a strategist at investment firm Baird.

The generals-versus-troops metaphor is a common way of understanding an indicator known as market breadth, a measure of how many stocks are participating in a given market move. For investors practicing technical analysis (forecasting the direction of stock prices based on statistical patterns), understanding breadth is key to determining whether a rally in the stock market will lead to a sustained recovery or is masking further bouts of turbulence and downturns.

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