The impressive resilience of stock market breadth is closely tied to the leadership of small-cap and mid-cap stocks. Large-capitalization stocks currently make up only about 17% of the issues traded on the NYSE, while mid-caps make up 52% and small-caps make up 31% of NYSE issues. In light of this data, and with small-cap and mid-caps performing so well in the first quarter, it is no surprise that market breadth, as measured by the NYSE advance/decline line, has continued in a strong uptrend despite rising interest rates and commodity prices. However, changes in market breadth can be swift, and there has been significant recent deterioration in this measure of the stock market’s internal health, with declining issues outnumbering advancing issues in five of the last six sessions. If it persists, this kind of deterioration will lead to significant problems ahead for the market.
Technically, the U.S. stock market appears to be at a critical juncture. Typically, bull markets that are at risk experience declining breadth, with leadership coming from a declining number of market sectors. This deterioration in breadth, which is one of the earliest and most reliable of bear-market warning flags, was absent in the first quarter, as the NYSE advance/decline line continued to make new highs through the end of March.