Market pullback masks improving breadth, Tamarisk portfolio manager says

Investing.com -- The recent decline in major market indexes belies a healthier underlying picture, according to Vincent Randazzo, CMT, portfolio manager at Tamarisk, issuer of the Defender Risk Adaptive 500 ETF (SPDF), who said breadth measures are broadening even as headline prices fall.

Randazzo told Investing.com that the rally off the March 30 low has moved through three distinct phases of participation.

The advance began broadly, with the percentage of Russell 3000 stocks trading above their 20-, 50-, and 100-day moving averages climbing off March 20 lows even before the major indexes bottomed, what Randazzo called "a constructive signal with a solid historical track record."

He noted that the foundation began to fracture around April 20, when advance-decline lines across multiple indexes, including the S&P 500, peaked even as headline indexes continued higher.

From that point through the June 2 market high, Randazzo said the rally became "increasingly narrow and tech-driven, led by semiconductors and AI-related stocks."

At the peak of that narrowing, just 27% of S&P 500 constituents had outperformed the index over the trailing 30 trading days, which Randazzo described as "a historically extreme reading."

“Those negative breadth divergences reflected exactly the kind of narrowing stock participation that typically leaves markets vulnerable to at least a consolidation or pullback,” he stated.

The third phase, currently underway, is what Randazzo called "the most interesting of all."

He explained that since the June 2 high, cap-weighted indexes have pulled back roughly 4.5% through June 10.

However, on June 10, when the Dow fell 1.87% and the S&P 500 dropped 1.62%, the NYSE recorded nearly twice as many new 52-week highs as new lows, with declining issues representing only 61% of all stocks traded.

"When liquidity is truly exiting a market, breadth deteriorates more severely. That is not what we're seeing," Randazzo commented.

He noted the NYSE Advance-Decline Line slipped fewer than 1,500 net issues from the June 2 high through Wednesday's close, even as the index fell more than 4%. On June 11, the Russell 3000 and S&P 600 Advance-Decline Lines reached multi-year highs, while the S&P 1500 A-D Line hit a new all-time high.

"These are not the breadth signatures of a cyclical market top," Randazzo said. “They are evidence of a long-term advance that is quietly and meaningfully broadening beneath the surface. That is the exact opposite of what the past week's headlines, and even day-to-day price movements, would imply.”

Randazzo added that “the rally was becoming increasingly concentrated into the June 2nd high, but it is broadening again now.”

“Investors may be focusing on the pullback in the indexes, but the internal evidence suggests the foundation of the advance is actually becoming more robust, not weaker.”

You May Also Be Interested In

• CFRA Starts SpaceX (SPCX) at Sell, 'Our primary concern is that SpaceX’s long-term strategy remains heavily dependent on Starship'
• Jefferies says restaurant traffic weakened in May
• AstraZeneca receives FDA approval for Truqap prostate cancer treatment