Does the Market Have Bad Breadth?

Stocks extended their streak of daily closing highs on the major market averages to four, as optimism increased for a trilateral trade agreement among the U.S., Mexico, and Canada by weeks end.

The NASDAQ Composite (INDEXNASDAQ) was the star performer, gaining nearly +1%; 8109.69, +79.65.

The NASDAQ rally was fueled by Amazon.com, Inc. (NASDAQ: AMZN) +3%, Apple Inc. (NASDAQ: AAPL), Alphabet Inc (NASDAQ: GOOG), NVIDIA Corporation (NASDAQ: NVDA) and Microsoft Corporation (NASDAQ: MSFT) all with gains of +1.5%, and a smattering of ~1% gains in other names.

The S&P 500 gained just over +0.5%, closing above 2900 for the first time. Energy stocks had moderate gains across the sector aided by a modestly bullish inventory report. Specialty Retailers and Metals/Materials were also mostly in the green.

Market breadth was positive as both the New York Stock Exchange (NYSE) and NASD had advancing issues beating decliners by 3 to 2. These Adv/Decl stats were slightly better than Monday, which raises an eyebrow, given Monday was such a convincing breakout day with Market Averages hitting new highs and breaching round number benchmarks — NASDAQ 8000 and Dow Jones Industrial Average (INDEXDJX: .DJI) at 26,000.

We could have expected breadth of at least 2:1 or better. Frankly, ditto for Wednesday as stocks clearly shifted into a higher gear just over an hour into trading after positive feedback from ongoing trade negotiations in Washington.

Is this a concern? Is it a red flag, or are their other factors in play?

At this point, maybe a Yellow Flag at worst.

While it’s not a rally that being driven by only a handful of tech stocks; AMZN +8% in the last week does stick out as a move that is a bit parabolic and not likely sustainable. I know, I know. The the landscape is littered with Amazon doubters over at least the last decade, but I’m talking the pace of the advance, (8% in a week), not the price level.

If all the FANG related stocks had similar performance during a low volume period in August, I’d be more concerned.

We’re within a few days of finishing out the month, and there is naturally some “churn” in the market. This can be part of a healthy rotation as investors and traders flush out some unwanted stocks that have rallied thanks to the “rising tide lifting all boats” phenomena. “Get these names off the sheet” as they’ll likely underperform if any pause or pullback we may see in September.

New highs have been achieved by Small Cap indices, as well as the S&P 500 and NASDAQ, and while tech has been a driver, neither Oil/Energy or Financials, 2 of the 3 largest mega sectors of the S&P are in new high territory. That’s Impressive, as it means there has been broad participation from many other sectors…Retailers immediately come to mind.

The market breadth is something to watch closely, especially the first couple weeks of September as volume normalizes. Stocks that have been very sensitive to tensions over trade talks and tariffs should also be in focus to see how they respond to the outcome of current negotiations.

Stocks set to open modestly lower this morning, Let’s pay attention to whether lower prices attract buyers, or give investors and traders cause for caution 2 days befor a long weekend.