As More Stocks Join the Rally, the Market's Breadth is Getting Better

The fact that more firms from all industries are taking part in the market's 2023 recovery is sometimes a sign of a rally's sturdiness.

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The S&P 500 has increased 7.1% in 2023, with the weakest performers from the previous year rebounding rapidly to take the lead. Some of the leading indicators of the American stock market include Meta Platforms Inc., META's 1.75 percent gain; and Apple Inc. In recent sessions, Microsoft Corp., MSFT (up 2.75%; green up-pointing triangle) and Apple Inc., AAPL (up 0.88%; green up-pointing triangle) both crossed their long-term trend lines.

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A commonly used technical measure for market breadth also reached a level last week that had not been seen in more than a year. According to Dow Jones Market Data, the proportion of S&P 500 companies that closed above their 200-day moving averages increased to 78% on Thursday, the highest level since September 2021.

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A large upward movement is often interpreted by traders and investors as a sign that a rally has staying power. Indexes are less susceptible to a downturn if a particular sector declines when stocks across the board are increasing.

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Jeff Kilburg, the founder and CEO of KKM Financial, described the growing rally as "feeling like someone is trying to hold a basketball underwater." According to Mr. Kilburg, the market is entering a new environment from the previous year as a result of the potential for interest rate easing. He expects that equities will continue to rise.

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In part, because investors are betting that inflation will moderate and the Federal Reserve would lower rates later this year, stocks have risen to start 2023. However, central bank officials have emphasized time and again that there is still much to be done to slow the economy.

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Some investors were taken aback by last week's unexpectedly positive jobs data, which made them reevaluate the direction of interest rates. Investors were concerned that a robust economy may force the central bank to continue tightening monetary policy faster than anticipated, which is why the main U.S. stock indexes declined on Friday and Monday.

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Recent falls signaled a slowdown in the otherwise strong rally in 2023. Last Monday, the S&P 500 reached a Wall Street indicator called a "golden cross," which can indicate more gains. According to Dow Jones Market Data, the 50-day moving average of the broad stock index closed above its 200-day trend line on Thursday for the first time since March 2022.

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According to some analysts, the most recent technical milestones are proof that the stock market rally is part of a longer-term ascent and not just a passing blip during the current bear market.

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The majority of equities participating in the market recovery, driven by shares of growth-oriented companies, is what Oppenheimer's head of technical research, Ari Wald, described as the "hallmark of a new bull market."

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He said of the larger market and mega cap tech stocks, "We're seeing strength in the soldiers, and the generals are now joining the rise as well."

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The S&P 500's most highly weighted stocks are among those pushing the index higher right now. One of the greatest underperformers last year, Tesla Inc., is up 58% this year. Another significant inhibitor for 2022, Amazon.com Inc., has increased by 22%. Alphabet Inc., which owns Google, is up 17%.

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The S&P 500's top-performing sectors this year have been communication services, consumer discretionary, and information technology, each of which has increased by double-digit percentage points. Utilities, healthcare, and consumer staples are the only sectors avoiding the rise in 2023. These are all regarded as defensive investments, where investors seek refuge during market downturns. The winning category from the previous year, energy, is also declining.

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In this market climate, according to Mr. Wald, investors should purchase shares at a discount as opposed to selling them at a profit. Stocks in the industrial, financial, and technological sectors are preferred by his company.

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Other investment professionals and analysts are not yet prepared to predict a market bottom.

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As she searches for equities breaking out above their 200-day moving averages to hold those levels, Katie Stockton, founder of Fairlead Strategies and portfolio manager of the Fairlead Tactical Sector exchange-traded fund, said she feels the market is in a testing phase. According to Ms. Stockton, her fund is still positioned defensively with a focus on Treasurys, gold, and energy.

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We want to ensure that it can endure here so that we can have faith in the rally's viability, she said.

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According to Ms. Stockton, the advancing breadth and momentum indicators may indicate that the upward trend in stock prices is overbought. She cites the low levels of the Cboe Volatility Index, or Wall Street's fear gauge, as evidence for her belief that investors may be becoming complacent as they chase the market. Last Monday, the VIX reached its lowest closing point in more than a year.

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Although he believes the market recovery is likely to be fleeting due to continued monetary tightening, Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, believes stocks may rise further in the coming weeks.

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Investors do not want to contend with a market that is displaying clear short-term momentum, he said.