It is no surprise that equity markets have been turbulent recently. With a new administration in the White House and a pandemic still playing out, it is difficult to anticipate what’s around the corner for investors. However, a new breadth analysis on the Standard & Poor’s 500 (S&P 500) suggests that a pullback may be the best course of action for investors.
The S&P 500 is a market-weighted index of 500 of the largest publicly-traded companies in the United States. The index serves as a benchmark for evaluating the overall performance of the large-cap segment of the US stock market.
One of the most important measures of the health of the stock market is the breadth of the S&P 500. The breadth of the index refers to the number of stocks within the index that are experiencing upward price movement. A strong breadth suggests that there is broad participation from investors in the stock market and that the stock market is performing strongly overall.
In recent months, investors have witnessed a significant decrease in the breadth of the S&P 500. This is evidenced by the S&P 500 falling below the long-term resistance level of 4600. When the S&P 500 is unable to break through this resistance level, it suggests that a pullback is likely in the near-term. This is due to the simple fact that there is not enough institutional buying to push the index through the resistance level.
Though the S&P 500 has seen declines, this pullback does not necessarily equate to a dismal outlook for the stock market. Rather, it simply suggests that investors should take a more cautious approach to investing. After all, a pullback could offer an opportunity to invest in undervalued stocks or industries that are currently underperforming.
Ultimately, investors should consider the findings of the recent breadth analysis and adjust their portfolios accordingly. Investing during times of uncertainty can be daunting, but by taking a measured approach, investors can ensure that their portfolios are properly aligned with the broader trends of the market.
