An unusual pattern emerging in equities hints that the bull market could be entering its final phase. Researchers at Ned Davis Research observed that market breadth — a gauge tracking the ratio of advancing versus declining stocks — is weakening even as major benchmarks linger near all-time highs.
Although the S&P 500 sits less than 2% below its August record, under 25% of index components traded above their 50-day moving averages last week, and fewer than 45% cleared the 200-day average, according to NDR’s analysis. This marks the poorest market breadth ever recorded while the index remains this close to peaks, wrote Ed Clissold, NDR’s chief U.S. strategist, and senior analyst Thanh Nguyen.
Historical divergences of this nature have appeared only rarely. The firm identified just six occasions since 1980 when fewer than 35% of S&P 500 stocks topped the 50-day average, fewer than 50% exceeded the 200-day average, and the index itself was within 3% of a record. Several preceded bull-market tops, including September 2014 and November 2021.
NDR notes such divergences have historically signaled near-term weakness. Once breadth decouples from index performance, the S&P 500 typically exhibits a “downward bias” for about a month, with the market peaking roughly five months later. “The vast majority of market tops are preceded by breadth divergences. We take technical warning signals seriously,” the analysts wrote. “The glass-half-empty view is that mega-caps are masking trouble under the surface.”
While maintaining a cautious optimism for now, the note advises that if divergences persist through any year-end rally, trimming equity exposure in anticipation of a topping process would be prudent.
Separately, HSBC strategists highlighted that U.S. equities have stayed resilient, yet market breadth has eroded amid a sharp rise in bond yields — evidence of “severe damage under the hood” in the stock market, they wrote in a Monday note.