The S&P 500 hit an all-time high with less than half of its constituents trading on point and figure buy signals for the first time since the late 90s.
It’s easy to draw parallels between today’s market and that of the late 1990s. We’ve done it a few times ourselves along with just about every other market commentator. Sometimes these comparisons require a few hurdles to jump through to make their point. While these are useful, there’s nothing like an elegant connection between two points in market history. Along those lines, May 14th was first time the S&P 500 Index (SPX) hit a new closing all-time high with less than half of its constituents trading on point and figure buy signals. This was only the third occurrence (excluding clusters within 30 days) with data going back to 1997 and first time it happened since December 1999. The other time the SPX was able to hit an ATH with less than half its stocks trading on point and figure buy signals was June 1998. With such a limited data set, it’s difficult to have strong conviction about forward returns for the market but they are outlined in the image below. In June 1998, the market didn’t have a problem with such a narrow market at ATHs and went on to gain over 16% over the next year but fell almost 10% over the next three months. On the other hand, December 1999 marked the beginning of the end for the Dot.com Bubble. What can be said for certain is that market breadth has been historically weak for it to be able to hit an ATH.
Looking back at the Bullish Percent for the S&P 500 (^BPSPX) from 1998-2001, both times SPX hit all-time highs with the indicator below 50% were when the indicator was in a column of Os. This is the same as the most recent occurrence. So, for all three occurrences market breadth was already declining as it headed into new ATHs. However, as we’ve talked about frequently over the last few years, the high level of market concentration has shown that the SPX can shake off poor breadth as long as those handful of mega-caps keep going. For better or for worse, the future of the market is dictated by a seemingly shrinking number of stocks.
