AI’s Impact on Market Breadth: A Sign of Caution?

AI’s Impact on Market Breadth: A Sign of Caution?

It has been hard to avoid AI news in markets recently. Big tech companies have been anxious to announce the amount they’re spending to keep up in the AI arms race. And the share prices of AI chip board designers have benefitted.

By contrast, the rest of the market appears to be, at best, muddling along. Even non-AI technology stocks have been struggling. This contrast shows up in the form of lousy market breadth.

What Is Market Breadth? 

Market breadth refers to the percentage of stocks participating in gains or losses. High breadth signals a sustainable market move. Low breadth signifies a weakening market. It’s like flying a twin-engine plane with one operational engine. And it’s a phenomenon we tend to see before market corrections.

2024: Bad Breadth?

We last saw this many negative Nasdaq breadth signals in December 2021. Over the next 10 months, the S&P 500 sold off by -25 %. And these results aren’t unusual. The S&P 500 has shown positive returns over the next 6 months in less than 50% of such instances.

How Might This Resolve Itself?

Poor market breadth usually resolves itself with some sort of pullback. A run-of-the-mill market correction is around -10 %. Poor breadth also preceded larger recessionary selloffs in 2000, 2008, and 2020. There’s no good way of telling which type of selloff we’ll get. Yet, it is a sign that now is an excellent time to exercise greater caution about risk. 

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