Market Breadth Is Getting Worse - How Far Is Too Far?

This week’s update at a glance

• US market breadth has deteriorated significantly. Eight of the 11 major US sectors are now in downtrend, while the equal-weight S&P 500 has been falling for weeks.
• The headline indices are telling a very different story. The S&P 500 remains around its highs and the Nasdaq has just recorded new all-time highs, creating an unusually large divergence between the index and the broader market.
• Bonds and credit are becoming more concerning. High-yield credit spreads have widened materially and long-term bond yields remain elevated, adding another layer of pressure beneath the surface.
• This is still a yellow light, not a red light. Technology and semiconductors remain exceptionally strong, meaning the equity market is still not confirming the sort of broad breakdown that would normally precede a major correction.

What you’ll learn

• What the charts of all 11 major US sectors are telling us about market breadth.
• Why the equal-weight S&P 500 provides such a different picture from the headline S&P 500.
• Why worsening breadth, higher yields and wider credit spreads matter, but do not yet amount to a crash signal.
• Why the continuing strength of technology and semiconductors is such an important counter-signal.

The thinking shift

There is an important distinction between an index and the market beneath it. If you look only at the S&P 500 or Nasdaq, the picture still appears remarkably strong. But once you remove the disproportionate influence of the very largest companies, a substantial amount of weakness becomes visible.

That does not mean we should automatically conclude that a major fall comes next. In fact, part of what makes the current environment so difficult is that the equity indices are not behaving the way I would normally expect if they were on the verge of a serious breakdown.

This is why I continue to come back to the same process. Respect what has deteriorated, recognise where risk has increased, but do not guess the outcome. Observe the money flows and respond as the evidence changes.

The contradiction inside the US market

Energy, healthcare and technology remain the three major sectors with positive longer-term trends. The other eight have deteriorated to varying degrees, with some of the weakness in areas such as real estate and utilities particularly sharp.

Yet technology remains extraordinarily resilient. Semiconductors in particular are performing far better than the macro environment would logically suggest. That strength says a great deal about market expectations for AI demand, data centre investment and the economics flowing through the semiconductor supply chain.

At the same time, the equal-weight S&P 500 has been weakening while the cap-weighted index remains near its highs. That tells us how much influence the largest companies are having on the overall index and why simply looking at the S&P 500 headline number can be misleading.

Where I’m focused now

• Market breadth: Whether weakness continues to spread across sectors or whether some of the weaker areas can stabilise and begin attracting capital again.
• Credit markets: High-yield spreads have widened noticeably. If that continues, it would provide more meaningful confirmation that tighter financial conditions are transmitting into the broader economy and equity market.
• Bond yields: The speed of change remains more important than any arbitrary yield level. Rapid moves can alter valuations, leverage and portfolio allocation decisions very quickly.
• Technology and semiconductors: Their continued strength remains a major counterweight to the bearish interpretation and demonstrates how powerful the AI capital spending theme remains.
• Stock selection: This is an increasingly discerning market. Companies producing strong revenue and earnings growth are still attracting capital, while weaker parts of the market are being punished much more severely.

The message therefore is not to predict what happens next. The risks have increased and the direction of several indicators is negative, but the evidence remains contradictory. Keep portfolio weightings appropriate to your own psychology, maintain disciplined exits and allow price action to dictate the probabilities.

Important information

_{Any advice in this video is general advice only. Neither your personal objectives, financial situation or needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice. Garry Davis (AR No:317590) is an authorised representative of Primary Securities Ltd (AFSL No. 224107).}

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