We are going to begin this update discussing market breadth. Here is an interesting statistic that comes from Optuma Technical Analysis:
“Apple gained 123 billion in market cap on Friday- the equivalent of total value of Starbucks… So far in 2023 it has gained 33%”
Apple is the largest stock in the S&P 500. Shockingly, Apple’s market capitalization is larger than the smallest 198 S&P 500 stocks combined. Its large, upward move so far in 2023 has contributed heavily to the market index’s performance. So goes Apple, so goes the market.
This has led to a recent, slight divergence in market breadth. Market breadth measures the number of stocks advancing versus declining. The chart below shows the S&P 500. The lower third of the chart shows the S&P 1500’s (largest 1500 US stocks) Advance Decline Line (AD Line). While the S&P 500 has moved sideways for the last three months, you can see that the AD Line has put in a lower peak-- a negative divergence. In other words, the majority of stocks did not rally much off of the market’s March lows.
Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.
This negative divergence makes some sense when looking at sector leadership. The S&P 500’s largest sector is Information Technology, accounting for 26% of the index’s market capitalization. On a risk-adjusted basis, the sector ranks third, just behind Communications, in terms of relative strength among the eleven S&P 500 sectors. Right now, only six of the eleven sectors are in what Canterbury defines as a “Bull Market State” or low risk market environment. Those six sectors account for 67% of the index’s market capitalization. In summary, if you have a large sector leading the markets, while a third of the index is in a Bearish or Transitional Market State, it is logical that market breadth shows a negative divergence.
Home Construction
As an S&P 500 sector, Real Estate is in a bear market. This sector, however, is mostly composed of commercial real estate stocks. Home building, on the other hand, has been one of the strongest industries globally. According to Canterbury’s risk-adjusted rankings, the industry ranks fourth out of 200 diversified ETFs. The chart below shows a home building ETF. You can see for the last several months, its relative performance to the S&P 500 has shown a steady increase.
Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.
Bottom Line
Over the past few months, the market has seen declining breadth, but has moved sideways. This means that a few larger market components are carrying the S&P 500 higher, while the larger population of smaller stocks retreats. This, however, has only been a short-term trend and is not yet a sign of long-term weakness. Right now, technology-related stocks are leading. Markets tend to do better when this occurs, as technology stocks make up the largest percentage of market capitalization.
With soaring interest rates on mortgages, one would expect to see home building stocks struggling. This has not been the case, as the home construction industry has been one of the best performers this year, from a stock perspective. Markets are counterintuitive.
Canterbury continues to monitor changes in volatility and relative strength but currently holds positions in US Home Construction and technology-related sectors, as well as international stocks (which lead US stocks on a relative basis). Canterbury also maintains inverse positions in some of the market’s weakest segments like Real Estate (mostly commercial) and Small Cap stocks. The goal of having a balance between stronger market components and inverse positions in weaker market segments is to maintain low and stable portfolio volatility.