Hi, everyone. I'm Liz Ann Sonders, and this is the October Market Snapshot.
Today, I want to focus on something that's easy to miss if you only watch the headline stock market indexes, and that is what's happening to the average stock. Because right now, the story told by the indexes and the story told by their members are two very different tales.
[High/low line charts for "Market halitosis" showing % of stocks above their 50-day and 200-day moving averages for the S&P 500, NASDAQ and Russell 2000 are displayed]
So let's start with market breadth, or what I'm calling market halitosis lately. The share of stocks trading above their 50-day and 200-day moving averages has dropped sharply across the S&P 500, NASDAQ, and the Russell 2000 Index of small-cap stocks. What stands out isn't just the level, it's the speed. Only a couple of months ago, as you can see, breadth was quite healthy, especially on the longer-term 200-day measure. That kind of rapid deterioration tells you selling pressure has been broad, not confined to one corner or two corners of the market. And when the 50-day readings fall faster than the 200-day readings, it suggests stocks that were in longer-term uptrends are now breaking down in the near term. And that's often how leadership erodes, quietly at first, then more noticeably.
[High/low bar chart for "Sector halitosis" showing % of S&P 500 members above their 50-day and 200-day moving averages is displayed]
And when we look at sectors, the breadth problem becomes clearer. Healthcare, Technology, and Energy are the only sectors where more than half of members are trading above their 200-day moving averages, while it's only Tech with more than half of its stocks trading above their 50-day moving averages. The good news is that these readings have been improving. What I find notable is that there hasn't been a classic defensive rotation. In a typical risk-off move, you would expect investors to hide out in sectors like Utilities, Consumer Staples or Real Estate. Instead, those sectors are among the weakest, and in the case of Utilities and Real Estate, they are weak because they're very interest rate-sensitive. Now, what we can glean is that this is less about rotation lately, and more about concentration, with money again crowding into a narrow set of stocks rather than moving among sectors.
[High/low bar chart for "Low new highs" showing % of S&P 500 sectors with 4-week and 52-week new highs is displayed]
Now, that same picture shows up in new highs. When a market is advancing on a broad foundation, you tend to see a steady flow of stocks making fresh four-week and fresh 52-week highs. Recently, that flow nearly dried up, with most sectors producing virtually none. Now, that has finally begun to improve with more readings on the board. Now, concentration is still an issue, however, and indexes can keep grinding higher for a while on the backs of what might be a small handful of large-cap stocks, but historically, that's a less durable footing than when the rally is shared.
[Table for "Under the hood" showing price performance and maximum drawdowns for S&P 500, NASDAQ and Russell 2000 is displayed]
And this is where looking under the hood really matters. The major indexes are all comfortably positive this year, and pullbacks from their highs at the index level have been relatively modest. But the average member of each index has endured far deeper drawdowns, in some cases several times worse than the index itself. That's the hallmark of what I've been calling rolling corrections. Stocks and segments of the market take turns getting hit, but the damage gets somewhat masked at the index level because the largest stocks hold everything together. If you only watched the S&P 500 or the NASDAQ at the index levels, you would actually underestimate how painful this year has been for many individual stocks.
[High/low chart and table for "No participation trophy" for % of S&P 500 members outperforming S&P 500 Index and S&P 500 Equal Weighted Index over the past 1m, 2m, 3m, 4m, 5m, 6m and 1y is displayed]
And the participation data reinforces that. The share of S&P 500 members that are beating the index over the past month has fallen back toward the low end of its range. And over the past year, less than 10% of stocks within the S&P index have outperformed the index itself. Even when you compare members against the equal-weighted version of the index, which strips out the dominance of the mega-caps, participation is relatively weak. In other words, this isn't simply a case of a few giants pulling away. Fewer stocks have been doing well in absolute terms, too.
[High/low line chart for "Not so equal" showing number of consecutive weeks of decline for S&P 500 Equal-Weighted Index is displayed]
Which brings me to the equal-weight S&P 500 itself. It has now fallen for seven straight weeks, a streak that was reached only a handful of times as you can see over the past three decades, and typically during bear markets. Now, I would caution against reading that as some sort of precise signal, but it does tell you the average stock has been under more persistent pressure, week after week, with little relief, at least so far.
[High/low bar chart for "Big > Small" showing the spread between the q/q % change in the S&P 500 and Russell 2000 is displayed]
Finally, size has mattered, as I already touched on. Large-caps meaningfully outperformed small-caps in the third quarter, reversing what was small-cap leadership in the first half of the year. And that shift is worth watching because smaller companies tend to be more sensitive to financing conditions. They also tend to have less pricing power and less balance sheet cushion than their larger counterparts. When investors gravitate toward larger stocks, it often reflects a preference for that perceived balance sheet-related safety, for quality, even within equities. For small-cap investors, it is really key in this environment to stay up in quality.
[List of "Takeaways" is displayed]
So what does this all add up to? Breadth is weak, but improving a touch, something to keep an eye on; new highs are scarce, but also improving a touch; index-level drawdowns understate the damage underneath; few stocks are outperforming; and both equal-weight and small-caps have lost ground to large-caps. None of that is a forecast of a broader decline. In part, because narrow markets can persist, and breadth can repair itself as it appears might be starting now. But a market leaning this heavily on a small group of stocks is a more fragile one, with less of a cushion if leadership falters.
For investors, I think the lesson is to resist judging your portfolio, or the market, solely by the index level. Stay diversified, rebalance with discipline, and pay attention to quality factors like strength of balance sheet, earnings consistency, high interest coverage. Those have tended to matter more in environments like this one.
Thanks for tuning in, and I'll be back next month.
[Disclosures and Definitions are displayed]