Breakout, Meet Breadth

There is no shortage of doomsayers - after all, oil has spiked, conflict uncertainty remains, the FED’s reversed into hiking and, no matter what Bessent says or does, bond yields have a mood of their own. Top that with renewed, yet again, concerns on AI bubble. YET, major indices are in new high ground. In our recent report, Threading The Needle, we highlighted two conditions that would strengthen what was already a bullish bias - a “sustained breakout” and a revival in breadth. Well, the breakout is here and breadth is starting to recover. Both are still nascent, but the early signs are encouraging. Holding above the new highs, combined with a sustained revival in breadth, would materially strengthen the bullish case as we enter 4Q.

Breakout Meets Breadth

• The Breakout - S&P Futures, at 7866.5 at the time of this writing, are above the 13 Aug and 22 Sep intra-day highs. Nasdaq 100 futures are similarly well above recent and all time highs.

• Flag Breakout? Nasdaq 100’s recent breakout after three months in the wilderness has the characteristics of a classic “bullish flag” breakout. S&P’s breakout now is following a similar pattern. Price is beginning to do what the bullish thesis required it to do.

• Breadth, Reviving - On most measures of market breadth, indices flirting with all-time highs while participation collapsed was an uncomfortable mismatch. The percentage of S&P 500 stocks above their 50-day moving average fell to around 20%, close to the lows seen at the end of March this year. Extreme breadth weakness creates the conditions for a rebound - but the turn still needs to happen. It now appears to be starting. Over the past couple of sessions, the measure has recovered to around 27%. Still low. Still fragile. But importantly, now moving in the right direction.

• Who’s got the Leadership? Even as breadth deteriorated, leadership rotated back in favor of the higher octane tech and Nasdaq 100 names. The leaders have finally been leading. That helps explain the apparent contradiction of collapsing breadth alongside indices near all-time highs - the largest-cap stocks were doing the heavy lifting. From there, the market really had two paths. Either the leaders lost their mojo, or the followers began joining the rally. The latter is clearly the more bullish outcome, and while still early, there are signs that this is beginning to happen.

Are We Out of The Woods?

Not Yet.

But two important pieces of the puzzle, a breakout and reviving breadth, are beginning to fall into place. Sustaining above 31,000 on the Nasdaq 100 and 7,800 on the S&P, alongside a continued improvement in breadth, would provide much stronger confirmation that the rally has further to run.

Yes, it is early. Yes, this is not full confirmation. Yes, there are plenty of things to worry about.

We are cognizant of the narratives. But the truth lies in the tape.

The index held near its highs while participation collapsed. The question now is whether breadth is finally catching up.