Why Strong Breadth Doesn't Mean What Most Investors Think

The S&P 500 hit an all-time closing high on June 2nd and has essentially gone nowhere since — down about 1.9% as of Friday’s close.

Join thousands of active investors who get this market analysis delivered straight to their inbox every week. Sign up for a free subscription today to ensure you never miss a key chart, trend, or indicator changing the market tape:

Tap Here to Subscribe Free or Paid

On the surface, that looks like a market catching its breath. Yet, underneath, something more interesting is happening: Market breadth, measured by the percentage of S&P 1500 stocks trading above their 200-day moving averages, has climbed to levels not seen in two years, even as the index itself has stalled.

That divergence is the jumping-off point for this week’s Deep Dive.

I dug into 26 years of breadth data to answer four questions I hear constantly:

How do you actually measure breadth, what separates good breadth from bad, is there a real relationship between breadth and forward returns, and — most importantly — how does breadth behave before corrections and bear markets hit.

The short answer: breadth tells you almost nothing about where the market is headed next in terms of returns.

But it tells you a lot about how much turbulence to expect getting there. I built a simple red/yellow/green early warning framework around that finding, and right now, despite the S&P’s sideways drift, we’re sitting in the green zone.

• The Rotation Under the Surface: The S&P 500 is down roughly 1.9% from its early June peak, but tech and semiconductors have plunged 11% to 12%. Meanwhile, sectors like Healthcare, Financials, and Industrials have posted strong single- and double-digit gains over the exact same period.

• Internals Hit a Two-Year High: When the market peaked in June, fewer than 60% of S&P 1500 stocks were above their 200-day moving averages. Today, that number has risen to 71.8%—the healthiest breadth readings we have witnessed since the summer of 2024.

• Debunking the Return Myth: Historical data shows that strong current market breadth does not actually guarantee above-average forward returns for the S&P 500; rather, the relationship is non-linear, with the absolute strongest returns ironically occurring after panic lows when breadth is totally washed out.

• Breadth Predicts Risk, Not Returns: The true value of tracking market breadth lies in managing risk and volatility. Historically, when breadth is above 70%, the probability of a 7%+ market correction over the next three months plummets to just 14.9% (well below the 25.2% baseline).

• Our Current Traffic Light Status: The market is firmly in the “Green Zone” (breadth above 70%), indicating a below-average risk of a major correction or volatility accident. A drop below 60% would trigger a Red light, signaling a time to de-risk.

• Where the opportunity is now: leadership has rotated away from technology and semiconductors (both down double digits since June) toward healthcare, financials, real estate, and energy — sectors the model portfolio has been building exposure to.

To see how we’re approaching the biotech and life sciences industries, check out last week’s issue “How to Piggyback on the Smartest Money in Biotech.”

If you’d like to download the slides and charts used in this Sunday Deep Dive in PDF forma, please tap below:

DISCLAIMER: This article is not investment advice and represents the opinions of its authors, Elliott Gue and Roger Conrad. The Free Market Speculator and Energy Bulletin are NOT securities broker/dealers or investment advisors. You are responsible for your own investment decisions. All information contained in our newsletters and posts should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.