Breadth Rates, & Sentiment: The Bull Case Builds

Market Breadth is Improving

Market breadth, or participation, is one of the most critical indicators for investors to watch. While the major indices often mask underlying strength or weakness, market breadth tells the true story. For instance, in November, market breadth began to deteriorate well before the major indices corrected. However, currently the exact opposite is occurring – more stocks are participating while the major market indices tread water. For instance, the number of S&P 500 stocks at 1-month highs is turning up – a bullish omen and a signal that the garden-variety correction investors experienced in November has concluded.

Interest Rates are Moving Lower

Federal Reserve-induced liquidity is the single most powerful indicator for investors to watch. In Wednesday’s FOMC, Fed Chair Jerome Powell just slashed interest rates by a quarter point. Although investors and betting markets expect rates to remain stagnant over the next two Fed meetings, the Fed just slashed rates within 2% of an all-time high in the S&P 500 Index. Historically, interest rate cuts within 2% of an S&P 500 all-time high are extremely bullish for equities. In fact, when such a signal has occurred over the past 45 years, the S&P 500 has achieved positive annual gains in every single instance.

Lack of Bullish Sentiment

Historically, market tops are preceded by extreme bullish sentiment. Although all the major equity indices are at or near all-time highs, sentiment remains muted. For example, the CNN Fear & Greed Indicator currently has a “neutral” sentiment reading – a bullish contrarian sign.

5 Hot Stocks on the Move

To emphasize how widespread market participation is today, here are 5 hot stocks on the move from different industries:

Precious Metals: Hecla Mining (HL), a gold and silver miner, gained 13%.

Discount Retail: Dollar General (DG), a discount retailer, jumped 5%.

Fiber Optics: Ciena (CIEN) gained 8.5% and is up 189% year-to-date.

Data Center Energy: Bloom Energy (BE) reversed early losses and is up more than 7%.

Financial: Recent IPO Figure Tech Solutions (FIGR) is up more than 6%.

Bottom Line

Improving market breadth, supportive interest rates, and cautious sentiment provide a bullish backdrop for U.S. equities. As more stocks participate and the Fed eases policy near record highs, the foundation for further market gains strengthens.

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This article originally published on Zacks Investment Research (zacks.com).

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