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.
More than the smallest big stocks beating the biggest bigs
Another typical measure of breadth is to compare the performance of the S&P 500 Equal Weight Index with the heritage market-cap-weighted version. This follows the premise that if the rally is broad based, then an exposure in which all stocks are weighted equally should be outperforming a more top-heavy gauge (i.e., smaller big stocks are rallying at the same pace as the biggest big stocks).
Up until November, the market-cap-weighted S&P 500 had a significant lead on the equal-weighted measure, outperforming it by 8.3%.2 In fact, while the market-cap-weighted S&P 500 was positive on the year, the equal-weighted version was down -5.33%.3 Further to this dichotomy of returns between weighting schemes of the same stocks, while the cap-weighted S&P 500 had registered 15 new all-time highs since the market’s bottom this year, the equal-weighted version failed to eclipse the level it last saw back on February 12. That was until November 9, as shown below.
On its way to new all-time highs, the equal-weighted version outperformed the cap-weighted version by 3% in November – a figure that ranks in the historical 97th percentile.
And while November gets all the credit for closing the gap between the returns for the equal-weighted and market-cap-weighted S&P 500, like DK Metcalf running down Budda Baker,4 burgeoning trends were evident in September and October – yet to a lesser degree. The September and October excess return figures were in the 83rd and 94th percentile, at 1.2% and 2.0%, respectively. However, when added together, the rolling three-month outperformance of equal weight to market-cap weight was also in the 97th percentile, as shown below – again indicating broader participation in the recent market rally.
The same level of breadth improvement was also evident from a sector perspective, as nine out of the 11 equal-weighted GICS sectors outperformed their market-cap-weighted counterpart in November — with Real Estate, Communication Services, Consumer Discretionary, Energy, and Technology having 7.5%, 7.1%, 6.4%, 6.2%, and 4.1% performance bumps, respectively, leading the way.5
S&P 500 Equal Weight Index vs. S&P 500 Index
November Excess Return
Rolling Three Month
Source: Bloomberg Finance L.P. as of November 30, 2020. Past performance is not a guarantee of future results. Percentile rank from 1988
Of course, a skeptic might say that this improved breadth is confined to only the largest stocks — yet that would be wrong. The improved breadth, as measured by equal-weighted outperforming market-cap-weighted versions, extends to both mid- and-small-cap stocks – forcefully reinforcing that it was more than just a handful of stocks charging ahead following the positive developments in November. As shown below, both the November and rolling three-month return metrics for mid- and-small-cap stocks were above the 90th percentile. Not to mention, we saw the same spike in firms trading above their own respective technical 50- and 200-day moving averages that large caps had – with close to 90% of mid- and-small-caps firms now trading above those levels, as opposed to approximately fewer than half of each at the start of November. Better breadth is being felt throughout the cap spectrum.
S&P 400 Equal Weight Index vs. S&P 400 Index
S&P 600 Equal Weight Index vs. S&P 600 Index
November Excess Return
S&P 400 Firms
S&P 600 Firms
% Above 50-day moving average (current)
% Above 50-day moving average (start of month)
% Above 200-day moving average (current)
% Above 200-day moving average (start of month)
Source: Bloomberg Finance L.P. as of November 30, 2020. Past performance is not a guarantee of future results. Percentile rank from 1994
Is this “good breadth” thing sustainable?
Looking ahead, there are four reasons why this ongoing better breadth rally may be sustainable and may put the past periods of mega-caps or bust behind us:
Cash still on the sidelines, while sentiment increased: Based on money market fund assets, there is still $600 billion more in assets in those funds now than there was during the pre-pandemic period.6 This number, however, has been reduced, as the AAII US Investor Sentiment Bullish readings increased to three-year highs.7 With such strong bullish sentiment, those money market assets could be further reduced, leading to cash coming off the sidelines and more buyers coming into the market to support market levels.
Positive vaccine approval and distribution news: So far, the UK has approved the Pfizer vaccine8 and the US Food and Drug Administration is likely to follow suit soon.9 The presence of a vaccine may allow for our society to get back to some form of normalcy, reopen economies, and hopefully get back to trend-line economic and corporate profit growth.
What’s working now hasn’t worked previously: The rally has boosted the performance of heavily shorted — and bet against — stocks. With positive news and a turn in sentiment, bearish positions have likely been reduced, leading to strong performance from beaten-down areas. This has not been a one-off bump either, as the most shorted stocks’ performance did not mean revert after the initial pop on November 9, 2020. That aspect supports market breadth, as once beaten-up segments are now positive performers.
Two doves: The probable appointment of former “dovish” Federal Reserve Chairwomen Janet Yellen as Treasury Secretary10 in the Biden administration, alongside the dovish position from the Jay Powell-led Federal Reserve, is likely to create a situation in which both fiscal and monetary policies remain uber accommodative. As a result, financial conditions are likely to be extremely easy, adding further support to risk assets like equities.
The future, however, remains cloudy, as COVID-19 case rates continue to increase. And just as we have experienced a once-in-a-lifetime pandemic, we will also likely see a once-in-a-lifetime recovery, featuring an evolution of social behaviors that is difficult to model with any certainty. But for now, the greater breadth of the latest market rally is constructive for sentiment and creating more confidence that this rally may hold. With these dynamics, specific positioning for the cyclical (banks, value, and small-cap) and secular (broad innovation, clean energy, and intelligent infrastructure) changes ahead may be optimal.
1As of December 2, 2020 per Bloomberg Finance L.P. based on the S&P 500 Index 2 Bloomberg Finance L.P. as of December 2, 2020 3 Bloomberg Finance L.P. as of December 2, 2020 4 "NFL players, fans take to Twitter to react to DK Metcalf's insane chase down tackle on Budda Baker", CBS Sports October 26, 2020 5 Bloomberg Finance L.P. as of December 2, 2020 6 Bloomberg Finance L.P. as of December 2, 2020 based on ICI Money Market Fund Asset reporting 7 Bloomberg Finance L.P. as of December 2, 2020 based on the AAII US Investor Sentiment Bullish Readings 8 "Covid-19: Pfizer/BioNTech vaccine judged safe for use in UK from next week", BBC News December 2, 2020 9 “FDA 'working day and night' on COVID-19 vaccine emergency use authorization, commissioner tells ABC News”, ABC News December 2, 2020
10 “Biden formally introduces economic team, including Yellen for treasury secretary”, NBC News December 1, 2020.
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