Fewer stocks are participating in this rally. History shows that bodes ill for future returns

Published Thu, Feb 8 20246:15 AM EST

A shrinking group of stocks are trending higher — a negative indicator for future market performance even as the S & P 500 is trading at all-time highs, according to Bespoke Investment Group. Despite the broad index continuing to move higher, the share of S & P 500 stocks above their 50-day moving average has fallen below 60%. That's a less-than-ideal sign, given the historical correlation between the percentage of stocks above the moving average and the S & P 500's performance one year later. The 50-day moving average finds the mean of the 50 most recent closing prices of a stock at any given point. While it can be used to evaluate short-term performance trends for an individual security, looking at the total number of stocks above or below their respective averages can also offer insight into the health of the entire market. Bespoke analyzed future returns for the S & P 500 every time it traded within 1% of a 52-week high going back to 1990. The firm then sorted those occurrences by the share of stocks above their 50-day averages. Bespoke found that if at least 90% of S & P 500 members were above their 50-day moving average, the index was always higher one year after it closed within 1% of the high. And the index added nearly 17% on average. But with fewer strong performers, the numbers are less rosy. Look what happens when between 50% and 60% of stocks in the S & P are above their 50-day moving averages — which is the case currently — and the index closes within a percentage point of its 52-week high. The S & P gains just around 6% on average, and is positive less than 65% of the time. And if more stocks fall below their 50-day averages, the outlook gets worse. If the index is within 1% of the high and less than half of the individual stocks in the index are above the moving average, it has historically declined. In addition to finishing higher only 31% of the time 12 months later, the index dropped nearly 2% on average. Bespoke's data comes as investors have grown increasingly concerned about the lack of breadth in the stock market's recent performance. A group of mega-cap technology stocks dubbed the Magnificent 7 has contributed outsized gains over the past seven months, leading some investors to question how their portfolios will fare if those big-name outperformers such as Nvidia and Microsoft and Meta pull back. "When the market is rallying, you'd prefer to have more stocks participating in the rally," the Bespoke team wrote to clients. "In case some stocks start to tumble, there are still plenty of others to carry the load."