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Market Breadth Ratio Puts a Smile on Investors’ Faces

Published 04/17/2023, 07:39 AM
Updated 07/09/2023, 06:31 AM
  • S&P 500's market breadth is positive, signaling a bullish outlook for the index.
  • Meanwhile, the 60/40 portfolio continues to make a comeback.
  • Despite this, bearish sentiment continues to remain above its historical average.
  • Market breadth, which reflects the strength of the market, has probably gone unnoticed by many investors.

    It is important for two reasons:

    1) It shows whether the rise or fall of a stock market index reflects the trend of the majority of the stocks that make up the index.

    • Positive: When the number of rising stocks exceeds the number of falling stocks. For example, if an index comprises 50 stocks, 36 will rise, and 14 will fall.
    • Negative: When the number of falling stocks exceeds the number of rising stocks. In the example above, 10 stocks rose, and 40 fell.
    • Neutral: When there is no significant difference between rising and falling stocks. For example, 26 are rising, and 24 are falling.

    2) It also reflects the percentage of stocks in a stock index trading above their moving averages.

    • 93% of the stocks in the S&P 500 are above their respective 10-day moving averages.
    • In addition, as of Friday's close, 59.7% of the stocks in the S&P 500 were above their 200-day moving averages.
    • The sectors with the highest percentage of stocks above this average are Technology (NYSE:XLK) (76%), Services (71%), Energy (NYSE:XLE) (70%), Utilities (NYSE:XLU) (69%), Healthcare (66%), and Consumer Staples (NYSE:XLP) (62%).
    • Although it is just a statistic, when 93% of the stocks in the index were above the 10-day moving average, the S&P 500 rose 23 out of 24 times, with an average increase of +18.2% in the following year.

    The 60/40 Portfolio Starts to Recover

    A 60/40 investment portfolio is 60% stocks and 40% bonds. This is why it is also called a balanced portfolio.

    In other words, it is a type of investment based on investing 60% of the capital in equities, which have a higher risk potential but also a higher potential return, and 40% in bonds (fixed income).

    2022 was a challenging year for this portfolio, falling by -16.1%. But so far, in 2023, it has risen by +6.2%.

    If we look at the figures for the last 94 years (excluding the current 2023), it has proved to be a successful investment strategy:

    Of the 94 years, it had a positive return in 73. The best years were:

    • 1954: +32.9%.
    • 1995: +31.7%.
    • 1933: +30.7%.
    • 1935: +29.8%.
    • 1985: +29%.

    Of the 94 years, it had a negative return in 21 of them. The worst years were

    • 1931: -27.3%.
    • 1937: -20.7%.
    • 1974: -14.7%.
    • 2008: -13.9%.
    • 1930: -13.3%.

    Key Dates to Watch

    I would like to highlight several key dates to watch. In some cases, these are significant events for the markets. In other cases, they are events that are unlikely to move markets.

    However, depending on how they might unfold, it is best to be aware of them, just in case.

    • On May 3, the US Federal Reserve will decide what to do about interest rates. It is expected to raise rates by another 25 basis points.
    • On the 4th, it is the turn of the European Central Bank, and all signs point to a hike, probably by 25 bp.
    • On June 14, the Federal Reserve is next. As of today, the market is expecting a pause.
    • On June 15, the European Central Bank is next. Another rate hike of 25 basis points is expected.
    • The next Fed meeting is on July 26. The pause in interest rates is expected to continue.
    • The next ECB meeting is on July 27. Interest rates are expected to peak.
    • June 4 is the OPEC meeting. It is essential to know what will happen with oil, as the world markets could suffer a supply deficit of around 2 million barrels per day in the fourth quarter due to the cuts announced by Saudi Arabia and its partners.
    • Turkey has elections on May 14. However, this would not affect the markets but could impact BBVA shares. Turkish equities started 2023 on the wrong foot as the prospect of political instability and the devastating earthquakes in February led to high volatility, taking the index from the best performer in 2022 to one of the worst. This year's decline was reduced to -6.4%, with the index gaining +4.7% for the week.
    • Greece goes to the polls on May 21.
    • Spain has regional and local elections on the 28th.
    • On the 12th, we have the NATO summit focusing on Russia's war with Ukraine.
    • In December, we have general elections in Spain.

    Investor Sentiment (AAII)

    Bullish sentiment, or expectations that stock prices will rise over the next six months, rose 10.8 points to 33.3% but remains below its historical average of 37.5%.

    Bearish sentiment, or expectations that stock prices will fall over the next six months, fell 10.6 points to 35%, its lowest level in seven weeks. However, bearish sentiment remains above its historical average of 31%.

    Investing Pro

    Disclosure: The author does not own any of the securities mentioned.

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