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Katie Stockton Discusses Concerns About Weak Market Breadth: Is It Time to Worry?

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Over the past few weeks, the U.S. equity market has seen a contraction in breadth despite the S & P 500 trading near all-time highs. This indicates that the recent rally in major indices has been narrow. The NYSE cumulative advance-decline line, a cumulative breadth metric, has pulled back since mid-May, suggesting that market breadth may continue to decline in the short term. As the number of decliners outpaces advancers on the NYSE, it poses a short-term risk for major indices.

The ratio of the small-cap Russell 2000 Index to the S & P 500 recently broke down to a new 52-week low, reflecting weak breadth behind the market. This breakdown represents a setback for small caps relative to large caps. While the Russell 2000 has pulled back since mid-May, aligned with the advance-decline line, major averages have been able to push higher. However, there are signs of deteriorating market breadth in a negative divergence between price and breadth metrics.

Despite the short-term contraction in breadth, a breakout in the NYSE advance-decline line prior to the current pullback suggests that market breadth should eventually expand in support of the cyclical bull trend in the S & P 500. Periods of breath contraction during uptrends can be healthy as they renew demand when markets appear extended. It is essential to pay attention to any ‘sell’ signals that arise in the presence of a negative divergence between price and breadth metrics.

The information provided by Fairlead Strategies is for informational purposes only and should not be construed as financial, investment, tax, or legal advice. It is important to seek advice from your own financial or investment advisor before making any financial decisions. The material presented may contain commentary on various indices, market conditions, securities, and cryptocurrencies, based on technical analysis. The views expressed in the material are solely those of the author.

Any investments made based on the information provided should be done under the same terms as non-affiliated investors. Fairlead Strategies or its affiliates may have positions in financial instruments mentioned and may have interests that differ from or are adverse to your interests. Past performance is not indicative of future results, and opinions and assumptions expressed in the material are subject to change without notice.

Overall, while there may be short-term risks due to the current contraction in market breadth, there is a possibility that market breadth will eventually expand to support the ongoing uptrend in major indices. It is essential to stay informed and seek advice from financial professionals before making any investment decisions based on the information provided in the material.

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