The Nasdaq has been rallying, but key breadth indicators are not reflecting this excitement due to the heavy weighting of hot big cap tech components like NVIDIA, SPDR Dow Jones Industrial Average ETF Trust, and Apple. While these stocks are performing well, most Nasdaq components are either not rallying significantly or are selling off. The number of new highs for the Nasdaq has been decreasing, currently sitting at 146, down from last week’s 227 and May’s high of just under 300. This negative breadth divergence is concerning for market observers.
Since December, each Nasdaq new high is met with fewer overall new highs for component stocks, indicating that money may be flowing out of other stocks and into a few hot names like NVIDIA. The Nasdaq advance/decline line, which is the number of advancing stocks minus declining stocks, is lower now than it was in mid-April, despite the index hitting new highs. The Nasdaq Percent of Stocks Above 50-Day Moving Average is also showing a similar trend, with fewer stocks able to stay above their moving average since the peak in December 2023.
The Nasdaq Composite Bullish Percent Index, a technical indicator that shows the percent of index stocks in bullish patterns, peaked in late December 2023 but has since declined to as low as 44%. After a rally in late April/early May, the indicator is now at 48%, much lower than the peak despite the Nasdaq Composite and NVIDIA hitting higher highs. This divergence between the index price and underlying breadth indicators is unusual, with money flowing into a select few hot stocks, leading to abnormal market conditions.
The wide divergence between the index price and underlying breadth indicators has raised speculation about what this may portend for the market as a whole. The abnormal situation in the Nasdaq, where a select few stocks are driving the rally while most components lag behind, has left investors and market watchers questioning the sustainability of the rally. As money continues to flow into a small number of hot stocks, concerns about a potential market correction or broader implications for the market remain a subject of intense speculation among financial analysts and investors.
