The Challenges of Narrow Breadth

Posted by Cam Hui -
Preface: Explaining our market timing models

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

 

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)
  • Trend Model signal: Bullish (Last changed from “bearish” on 27-Jun-2025)
  • Trading model: Neutral (Last changed from “bullish” on 31-Jul-2025)

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
 

Subscribers can access the latest signal in real time here.

 

 

A Magnificent Seven Market

I have heard many concerns from chartists in the past few months about the narrow nature of breadth in the U.S. equity market. Today, the Magnificent Seven dominate market leadership while the equal-weighted S&P 500 lag the cap-weighted index.

 

I am reminded of Bob Farrell’s Rule #7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names”; and Rule #3: “There are no new eras—excesses are never permanent”.
 

 

How worried should investors be?
 

 

The Risks of Narrow Breadth

Here are the risks of narrow breadth.

 

The accompanying chart shows the relative returns of the top five sectors by weight in the S&P 500, which comprise over 70% of index weight. Sector leadership has been reduced to technology and everything else. Only tech stocks are leading, and the rest of the market is either underperforming or flat with the index.
 

 

Narrow breadth raises the risk of sudden downdrafts, as evidenced by the trigger of a cluster of Hindenburg Omens. To explain, the market flashes a Hindenburg Omen sell signal when a highly bifurcated market, which indicates fragility, turns down from an uptrend. A single signal can be regarded as noise, but a cluster of signals can warn of an imminent pullback.

 

Despite the ominous name, most Omens resolve in shallow pullbacks, though most major tops saw Omen signals.
 

 

This begs the question of whether the stock market at risk of a correction? Market leadership is certainly narrow and bifurcated, but is breadth turning down?
 

 

Glass Half Full?

Here is my assessment of the challenges posed by narrow breadth. While relative breadth, or the ratio of the broad market to the S&P 500, is weak, absolute breadth remains positive.

 

The accompanying chart tells a glass half-full or half-empty story of the Advance-Decline Lines. The glass half-empty narrative is the negative divergence between the S&P 500 and the A-D Lines, which have largely traded sideways as the S&P 500 rose. The glass half-full view is both the NYSE and S&P 500 A-D Lines made recent fresh all-time highs, which confirm the overall strength of stock prices.

 

 

I am siding with the glass half full explanation.
 

The next task is to assess the strength of large-cap technology leadership. The tech-heavy NASDAQ 100 has been rising in a well-defined rising trend since May and it found support at the trend line, both on an absolute and relative basis  The first five days of November is the window for hedge fund redemption notices, and redemptions may have provided the impetus for profit taking and trimming of AI-related winners.
 

 

Odds are that the large-cap technology pullback is only temporary. An analysis of the relative performance of large and small-cap technology stocks shows that while large-cap tech stocks weakened, small-cap technology was soaring relative to the Russell 2000.
 

 

 

The Big Picture

Putting all together, I pointed out last week (see Prepare for the Year-end Rally!) that the technical picture is a globally and broadly based momentum-driven bull market. Concerns about the narrowness of U.S. market leadership should be viewed in that context.

 

The question of equity positioning is another matter. The Magnificent Seven question can be distilled to a choice between growth and value stocks. An analysis of growth and value leadership through a market cap and global prism shows that growth is only dominant in U.S. large caps. Value has outperformed growth outside the U.S. in a choppy fashion since May, and there are no major trends between the two in mid- and small-caps.
 

 

Resolving the narrow breadth question requires out-of-the-box thinking. I reiterate my view that equity investors should adopt a barbell strategy of overweight U.S. large-cap growth and non-U.S. developed market value stocks. The Magnificent Seven stocks are probably in a bubble, but we have no way of forecasting when the bubble pops. U.S. large-cap growth and EAFE value have beaten their regional benchmarks since early 2023. The bottom panel shows that EAFE value (red dotted line) has kept pace with the MSCI All-Country World Index, despite a lack of exposure to the Magnificent Seven and U.S. AI stocks. Such a posture allows investors to benefit from the market leadership of U.S. technology while diversifying against bubble risk. Should the bubble pop, the exposure to EAFE value, which has kept pace with the global index, would provide superior relative performance.
 

 

 

The Week Ahead

Looking to the week ahead, the S&P 500 ended an upper Bollinger Band ride last week and weakened to the 50 dma support level. Past pullbacks in the most recent bull trend have ended when the 5-day RSI became oversold. Next week’s market action will be a key test of the market uptrend.