The market’s breadth suggests there is plenty of upside potential for stocks.
The stock market has gone seven months without a 5% selloff as of Monday, fueling dire predictions of an imminent correction. But an important market gauge suggests fears of an equities bubble are overblown and there is plenty of room for stocks to carve out new highs.
“The bubble talk has been growing louder. Yet breadth is actually much more robust than many think,” Jonathan Krinsky, chief market technician at MKM Partneyuprs, said in a note.
Breadth is a technical tool to determine the market’s direction by tracking the number of advancing versus declining stocks. Based on the S&P 500’s trading range from March to May, Krinsky sees the large-cap index rallying to 2,475 in the near term.
Worries about limited breadth, where the market relies on too few stocks to support its upside momentum, have led to concerns that the eight-year-old bull market is on its last legs.
Not so, said David Kostin, chief U.S. strategist at Goldman Sachs, who dismissed such reports as “fake news.” Breadth, according to Kostin, is in line with its 10-year average.
Last week, breadth indicators for stocks listed on the New York Stock Exchange and the S&P 500 SPX, -0.12% hit all-time highs as stocks set fresh records.
A big chunk of the market’s gains have come of the backs of technology stocks. Yet they are nowhere near the extremes witnessed during the height of the dot-com era.
“During the mid-to-late ’90s, the Nasdaq 100 was often 20% above its 200-day moving average, and peaked around 60% in early 2000,” said Krinsky.
The Nasdaq 100 NDX, -0.06% is currently trading around 15% above its 200-day moving average.
That the market has gone for an extended period without a drawdown is partly behind the bubble jitters. As of June 2, the S&P 500 has logged 143 sessions without a 5% pullback from its 52-week high on an intraday basis, the ninth-longest streak going back to 1982, according to Krinsky. But the index’s 17% gain makes it the third-best rally among such streaks.
Even as stocks finished marginally lower Monday, the positive backdrop for the market remained mostly intact on steady corporate earnings growth, as the U.S. economy continues its even-paced expansion.
The “weight of the evidence” for the market is bullish, said Stephen Suttmeier, a technical research analyst at Bank of America Merrill Lynch.