Chart analysts see market correction coming after temporary debt ceiling-deal euphoria

Published Tue, May 30 202310:02 AM EDTUpdated Tue, May 30 202311:29 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The agreement on a debt ceiling deal in Washington surely caused sighs of relief on Wall Street, but technical analysts are still ringing alarm bells about another topic: narrow stock market leadership. The recent market gains have been powered in large part by a few tech giants, such as Nvidia . But market breadth, or the measure of how wide-reaching a rally is, has ebbed. CanaccordGenuity technical analyst Javed Mirza said in a note to clients on Monday that an "intermediate-term equity market correction looms" if market breadth does not improve. "A negative divergence is forming between the Goliath led Nasdaq-100 and S & P 500 ... as the more diverse TSX Composite, Russell 2000 and Dow Jones Industrial Average ... remain below their April highs, indicating that market breadth is weakening," Mirza said. Over the past three months, the Nasdaq 100 has gained more than 18%, and the S & P 500 has advanced nearly 6%. Meanwhile, the Invesco S & P 500 Equal Weight ETF (RSP) has fallen more than 3%. .NDX 3M mountain Large tech stocks have outperformed other areas of the markets in the past three months. Mirza is far from the only technical analyst noting that mega-cap tech stocks are pulling away from the rest of the market. "Something happened in early February when Computers (AI) began to massively outperform Consumers (XRT)," BTIG analyst Jonathan Krinsky said in a note to clients on Sunday. "Maybe it's a new paradigm, or maybe the 'real economy' i.e., the consumer is telling us something? We continue to side with the latter." Even if the sector descriptions are stripped away, the underlying technical picture is concerning, Roth MKM chief market technician JC O'Hara said in a note to clients on Monday. "Typically, when we see a market on the verge of breaking out, new 4-week highs expand. We are seeing the exact opposite, new 4-week lows are starting to swell. Just another sign that the market's breadth is weakening under the surface," O'Hara said. To be sure, there are some stocks outside of technology that are making new highs. According to Bespoke Investment Group, 90 stocks in the S & P 500 have hit 52-week highs this month. The list includes 16 health-care stocks and eight consumer staples names. And Fairlead Strategies founder Katie Stockton said in a note to clients over the weekend that the S & P 500 has confirmed a breakout above "cloud-based resistance" and that breadth should improve from here. — CNBC's Michael Bloom and Tanaya Macheel contributed reporting.