Weak Market Breadth is Very Bullish for Stocks

This is versus a long-term average of 48%:

The big question now is what happens to stocks after weak participation. The answer may surprise you.

Weak Market Breadth is Very Bullish for Stocks

To settle the debate we went back and found that since 1928, when breadth is weak, the forward returns for the market are quite attractive.

When breadth is very strong, the forward 12-month S&P 500 return is 7.4%. Which isn’t bad. However, when leadership is narrow, a year later the S&P 500 jumps 15.4%:

Maybe you’re curious why strong breadth tends to result in muted forward gains? Well, when everything’s up significantly, powering extra upside can be limited.

Weak market breadth can indicate many unloved stocks are attractively valued.

Recently, leadership has been improving. Consider that YTD the S&P 500 (SPY) is up 16.4% vs only 5.9% for the S&P 500 equal weight index (Invesco S&P 500 Equal Weight ETF RSP). On a one-month basis, the equal-weight index is inching higher with a 3.6% gain vs 3.5% returns for the S&P 500.

At MAPsignals, our data has been pointing to strength under the surface all year. The Big Money Index (BMI) has been in a massive uptrend since October, pointing to healthy inflows into stocks:

History says don’t get too bearish when breadth is thin. The constructive inflows into stocks supports that narrative as well.

The Bottom Line & Explanatory Video

Weak market breadth is bullish, not bearish. Based on history, stocks gain 15% a year after narrow leadership.

The Big Money footprints tell the same story.

If you want to take your investing to the next level, learn more about the MAPsignals process here.

For a deeper dive on this writeup, you can read the longer version here.

Disclosure: the author holds no positions in SPY or RSP at the time of publication.