June Outlook: Another Bullish Indicator from Market Breadth
- Brad Tremitiere CIO
- 4 days ago
- 6 min read
Another Bullish Indicator: Market Breadth Points to Potential Upside
In our monthly musings we have often mentioned market breadth and its importance as a leading indicator for market price. We keep data on daily breadth for several different markets, daily breadth for the New York Stock Exchange (NYSE) remains the most important to us. The reason why we lean on the NYSE data more than other markets is that it is one of the largest, with roughly 2,800 issues traded on a daily basis, and one of the most diversified. Along with equities, a wide range of securities are traded on the NYSE, including bonds, options, ETFs, and closed-end funds. This diversification offers a broad-based viewpoint of the total market, just not equities.
Breadth is a simple calculation; it is the number of daily advancing issues on an exchange minus the number of daily declining issues. To create a cumulative breadth reading, we simply add the current day’s value to the previous day’s value. On Friday, May 16, the cumulative breadth of the NYSE reached a new all-time high, closing above the previous high from November 29, 2024. The recent all-time high in market breadth on the NYSE is notable. Historically, breadth has sometimes preceded price movements, though this relationship can vary depending on broader market conditions.
When breadth and price diverge, whether it is a positive or negative divergence, breadth is usually correct in its direction, meaning price will eventually catch up. Negative divergences are a very early and important indicator signaling a potential longer-term bearish term in the market. As an example of a negative divergence, let’s look at the correlation between NYSE breadth and the S&P heading into the Great Financial Crisis in 2007.
After a strong run coming out of the Tech Bubble bottom in 2003, both NYSE Breadth and the S&P 500 continued to work in a pattern of higher highs and higher lows, until June of 2007. The cumulative NYSE Breadth reading peaked on June 4, 2007, with the S&P 500 closing at 1,539.18. Over the next four months, the S&P experienced some volatility but reached a new all-time high of 1,565.15 on October 9, 2007, an increase of 1.69% from the June high. But over the same four-month period, NYSE Breadth declined by -3.60% and never confirmed the all-time high in the S&P. It would not be until Christmas Eve of 2009, or 648 trading days before Breadth would make a new all-time high. Over those 652 trading days, the S&P lost -26.72%. Again, Breadth leads price.
A positive divergence, where breadth is leading price, tends to almost always have a positive outcome as price must catch up, which is what we are currently seeing in the market. With the NYSE breadth making a new all-time high on May 16th, the S&P 500 remains about 3.10% below its previous peak. While this is not a massive divergence, it remains a positive one and one that should indicate that the S&P 500 will make a new all-time high.
Historical All-Time High Data
We went back and looked at the periods within the market where NYSE Breadth made a new all-time high, the number of trading days until NYSE Breadth made its final high, and what the performance of the S&P 500 was during that time. Since there were very few new highs in NYSE Breadth prior to 2003, we used the December 8, 2003, new all-time high in NYSE Breadth to begin our study. Below is a listing of all the 11 new all-time breadth highs produced by the NYSE since 2003:
Historically, new all-time highs in NYSE Breadth have often been followed by gains in the S&P 500 prior to the final breadth peak, though this relationship can vary depending on broader market conditions. Of the 11 new NYSE Breadth highs, the average S&P 500 return has been 23.31% over 289 trading days.
One of the characteristics of bull markets is that NYSE Breadth continues to make new highs as we will show shortly. So, to make our data quantifiable, we used a 50-trading day reset, meaning that if breadth made a new all-time high but then failed to reach another new high within 50 trading days, the positive breadth period was terminated, and a negative period would have begun. The chart below shows how the S&P 500 has performed during these periods since 2007:
In 11 historical instances where NYSE Breadth did not reach a new all-time high within 50 days of the previous peak, the S&P 500’s subsequent returns were generally below average. However, outcomes varied depending on broader market conditions. Over an average of 203 trading days, the S&P lost -4.19%. When we enter a period of negative breadth, it becomes extremely important for any negative divergence that occurs to be rehabilitated quickly. The longer the S&P continues higher while breadth is falling typically signals a much larger issue with the market is going to appear.
For example, while NYSE Breadth peaked on January 4, 2007, the S&P kept pushing higher for another ten months. It was not until October 9, 2007, after a gain of 10.35% and 192 trading days, did the S&P 500 mark its final high. As we said earlier, breadth leads price and when there is an extremely long divergence, price is going to eventually move very quickly to get back in line. In the case of October 9, 2007, S&P 500 new high, the Index lost roughly -41% of its value over the next year.
The S&P 500 is currently showing signs of a positive breadth divergence, which in past instances has sometimes preceded market strength. However, outcomes can vary, and investors should consider broader market conditions and risks.
June Market Outlook
Given the current breadth divergence, it’s easy enough to say that June should be another positive month. Based on historical observations, in several instances where a new NYSE Breadth High occurred more than 50 days after the previous one, the market has sometimes entered an overbought phase. In those cases, the S&P 500 experienced an average short-term decline of approximately -3.20% over the following five weeks.
Over the last twenty years, June has represented the second worst month for the market as represented by the S&P 500. Only the month of September, which is also the only month that on average has been negative, shows worse performance than June on average. But as we know, trends do change in the market, and outside of June 2022, the month has been leaning much more toward the positive side over the last decade.
Looking at the S&P Money Flow indicator, which is an excellent gauge of overall market liquidity, this indicator is at its highest level since July of last year. Currently, 79% of the stocks inside of the S&P 500 have positive daily money flow. This indicator clearly shows that most stock in the index are closing higher on a daily basis verse their opening price, a sign of accumulation. Expecting money flows to lead price like the way breadth days, the current strength we are seeing leads us to expect higher prices in the market.
We also must play somewhat of a devil’s advocate since we know what can happen when everything looks too ‘bullish’.
Obviously, there are tariff and trade deal issues that remain, but as we have seen, any weakness now caused by the news is quickly bought up.
Congress is still trying to push through the Big Beautiful Bill (taxes) as well as a resolution to raise the debt ceiling. We assume there are about 6 weeks left to raise the debt ceiling before the market begins to become concerned.
The Fed meets again, the third week of June and makes their policy announcement on June 18th. Recent data suggests that market expectations for inflation may not fully reflect underlying economic indicators, potentially leading to misalignments in forecasting. It’s difficult to understand their current hardline stance on inflation when the Consumer Price Index just registered its smallest 12 month increase since February 2021. The longer the Fed remains stubborn in their higher for longer stance, the more damage that will occur within the economy.
For now, it appears that the market should continue to have a bullish bias, and we should expect new highs at some point in the near the future. As we get deeper into the summer months and the “Sell in August, Come back sometime in October” motto kicks in, we will be on the lookout for more volatility. Enjoy the ride for now.
Chief Investment Officer - Partner
Financial Advisor
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