Trouble is brewing in an indicator measuring how many companies are keeping the stock market aloft in the U.S., just as the Standard & Poor’s 500 Index threatens to give up gains for the year.
About 59 percent of stocks closed above their 200-day moving averages at the end of last week, the lowest percentage in eight months, according to data compiled by Bloomberg. Waning breadth is holding back a version of the equity gauge that strips out market-value biases, the S&P 500 Equal Weight Index, which is down 0.4 percent since March.
So few stocks have been left behind in the American bull market that any sign that breadth is breaking down is viewed with concern by analysts who base trading decisions on charts. To FBN Securities Inc.’s JC O’Hara, the thinning foundation is like a game of Jenga, where each wood block removed increases the chance the tower will fall.
“We’ve seen time and time again when the market makes a new high that the internals are not responding,” said O’Hara, the New York-based chief market technician at FBN. “For a technician looking at that, that’s a cause for concern. The market is grinding sideways and fewer stocks are moving higher.”
Equities fell for a third day on Monday, with the S&P 500 dropping 0.7 percent to 2,079.28, within a percentage point of wiping out its advance for 2015.
The S&P 500 is down 2.4 percent since reaching an all-time high of 2,130.82 on May 21. It ended little changed at 2,080.15 on Tuesday.
The last time this measure of breadth fell so low was Oct. 23, when the S&P 500 was recovering from a 9.8 percent plunge from a September high. The gauge closed at 1,950.82 that day, 6.2 percent lower than where it is today.
The weakening is being led by stocks more sensitive to interest-rate increases. Yields on the 10-year Treasury note have climbed to 2.38 percent from 1.86 percent in the past two months on speculation the Federal Reserve is moving closer to tightening monetary policy.
About 13 percent of S&P 500 utility companies closed above their 200-day moving averages Friday, the fewest in over five years, Bloomberg data show. Just 25 percent of real-estate equities in the gauge ended Friday higher than the 200-day measure, the fewest since November 2013, the data show.
Energy stocks are another big contributor to market breadth declining, with only 27 percent of them closing above their 200-day moving averages Friday. The group has plunged 24 percent since peaking last June, hurt by a slide in oil prices in the past 12 months.
“The S&P 500 has generally been moving sideways to higher, so there’s definitely a negative correlation here,” said Jonathan Krinsky, the chief market technician at MKM Holdings LLC. “A lot of it can be tied to interest-rate sensitive stocks and commodity stocks.”
While the weakening breadth is on Krinsky’s radar, he said it’s not something investors should act on until the S&P 500 falls below 2,040, a level it last touched in March.
Traders have built up near-term portfolio hedges as stocks have bounced around in a 90-point range since February. The Chicago Board Options Exchange Volatility Index, derived from the cost of one-month S&P 500 options, has climbed 26 percent since May 21 to a 10-week high of 15.29.
The gauge known as the VIX dropped 5.4 percent to 14.47 today.
While the anticipation of a rate hike threatens to bring down several industries, it has boosted the appeal of others. Banks, whose lending profits benefit from higher loan yields, have surged 16 percent since January. Consumer-discretionary companies have jumped 10 percent since then, aided by the stronger dollar.
The lack of breadth isn’t an indicator of a market top or an impending correction, but it could foreshadow smaller pullbacks similar to what has been seen this year as these groups continue to churn, according to Oppenheimer & Co.’s Ari Wald.
“We are seeing a consolidation and that’s why the market has lacked direction,” said Wald, Oppenheimer’s New York-based head of technical analysis. “There are some stocks that have been performing very well and other stocks that have been under a lot of pressure. That’s what has caused this choppy behavior.”