The stock market has been on a fervent rally since March, rallying by over 65% as of December 2. 1 However, because not all stocks have participated equally, the rally has been described as having “bad breadth.”
However, November’s strong market gain of 18 percentage points has changed the market’s breadth – from bad to good. This performance was supported by two headwinds being removed at the same time: US election uncertainty was resolved, and promising vaccine trials that firmed up the timeline for the distribution of a COVID-19 vaccine acted as the “mint or stick of gum” that the market needed.
In this charting the market, I will showcase how pervasive the change in the market’s breadth has been.
A fall rally that is different than the summer one
One measure to gauge whether all boats are rising with the tide is to calculate the percentage of firms trading above a technical level, such as a stock’s 200-day moving average. If the S&P 500 Index is notching all-time highs, but only slightly more than half the stocks are trading above their own recent averages, the broad market gains are being powered by only a handful of stocks. This trend occurred in the spring and summer months.
However, as shown below, that summer/spring trend flipped with the November rally. Now, more than 450 stocks in the S&P 500, or 90%, are trading above their respective 200-day moving averages. The closing of the gap between the two-time series plotted below illustrates how more firms are participating in the latest rally.