Long-term trends weaken as the S&P 500 hovers near highs

Key points

• Market breadth is deteriorating significantly, with fewer than 55% of S&P 500 stocks trading above their 200-day moving average despite the index hovering within 3% of a record high.
• Historically, this specific divergence has preceded negative returns and elevated risk, particularly over the subsequent 2 to 16 weeks.
• Broader composite models, including the Market Environment and Risk On/Off Indicator, are signaling "unhealthy" or "risk-off" conditions, corroborating the breadth warning.

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names" - Bob Farrell

Bob Farrell's 7th rule in his 10 rules for investing is undoubtedly being tested as market breadth deteriorates. Yet, the S&P 500 remains resilient, hovering just under its record high. Said another way, the generals are holding steady while the soldiers falter.

The latest indicator highlighting the dwindling participation comes from the percentage of stocks in the S&P 500 trading above their 200-day average. For only the 9th time since 1998, fewer than 55% of the members held above their long-term averages as the S&P 500 resided within 3% of a high.