Improving Breadth Gives Stock Bulls Solace Into Murky September

(Bloomberg) -- Investor confidence is growing in companies both big and small, providing a crucial pillar of support for Wall Street traders ahead of what’s typically been a challenging month for stocks.

Participation in the equity market rally has been remarkably broad, with 64% of Russell 3000 Index members trading above their 200-day moving average, the highest proportion since December. Market peaks tend to develop when the reading falls below 60%, data compiled by technical strategists at Oppenheimer & Co. show.

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Strengthening breadth gives some peace of mind to those worried that weakness in a small cluster of stocks will have an oversized influence on the broader market. That’s a welcome development for investors heading into September, a notoriously turbulent month marked by rising volatility and waning retail buying.

“Market breadth has improved notably in recent weeks,” said Ari Wald, head of technical analysis at the firm. “Breadth improvement decreases the risk that a major top is forming, in our view.”

The torrid rebound from April’s lows has largely been driven by technology giants as investors piled into the group amid a hunt for perceived safety. So the recent increase in the number of stocks shouldering the rally is a welcome sign for bulls.

“The broadening we’re seeing post-Jackson Hole might be the start of a bigger trend with participation from parts of the S&P 500 that didn’t get much love,” said Bloomberg Intelligence senior equity strategist Michael Casper.

Roughly 67% of stocks in the S&P 500 Index now sit above their 50-day moving averages, according to BI data. Moreover, about 68% are now above their 200-day moving average, a substantial jump from July when only about half of constituents cleared those thresholds.

“Breadth is improving, and while I wouldn’t call it outright strong, the direction of travel is favorable right now,” said Kevin Gordon, senior investment strategist at Charles Schwab & Co.

It’s evident especially in the mega-cap sectors — information technology, communication services, and consumer discretionary, Gordon added. He pointed out that an equal-weight version of the consumer discretionary sector is at an all-time high while the cap-weighted version has struggled to keep up.

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That gives investors something to look forward to ahead of what’s often been a difficult period for stocks. September is the only month when the probability of the S&P 500 falling is higher than rising, according to data from UBS Securities LLC. The US benchmark has dropped 0.7% on average over the past 75 Septembers.

But while market breadth has shown notable signs of improvement, more work could be done. The S&P 500 has advanced 30% since its April 8 low, compared with a 23% gain in its equal-weight peer.

This doesn’t happen often. In fact, over the past 30 years, the only other time the main benchmark has had edge over the equal weight was in 1998, according to a BI analysis from strategist Gillian Wolff of data through Aug. 25th.

“Investors have had a lot of confidence, rightly so for now, that every dip is a buy,” said Thomas Thornton, founder of Hedge Fund Telemetry LLC. But the technology favorites they gravitate toward are narrow and have stretched valuations and technicals, while fund managers are overweight those same names, he said. “That will matter when the next dip fails to bounce.”

--With assistance from Matt Turner.

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