Daily Brief - The market is out of breadth (Dec 16, 2021)

Have you ever heard of market breadth?

It’s a simple concept: breadth is a count of how many stocks in a market are going up.

There are many ‘flavours’ of breadth. The version below is based on how many of SPX’s 500 stocks have made a new high in the last 3 months:

So those reports saying the market was only up thanks to AAPL? They have been greatly exaggerated: this chart tells you that leadership in the market is still fairly broad-based.

This statistic is important for the bull market. Ideally we seek broad-based bull markets, where a large set of constituents are leading the market higher.

But one still has to be careful: breadth is shrinking and that can make it harder to trade. Just look at what happened to Cathy Wood’s ARKK.

The chart below shows something remarkable: during each drawdown ARKK has experienced a 3-5x beta* to SPX - whereas on the upside its beta is only 1.5x!

That is exactly what happens when market leadership shrinks: your loser stocks don’t rally back**.

Source FT

So where does this leave us in terms of investing?

Option A - hug beta: hug those winning market leaders and stay with the market until it lasts.

Option B - buy value: if you’re convinced that leadership will keep shrinking, value is your friend. There are tons of stocks at all-time lows in the market and TOGGLE can help you find them.

Well in reality you have two more lazy choices…

Option C - barbell your portfolio: do both A & B, which is the classic approach also common to risk-parity: ‘I don’t know what will work so I will do both - and pray’.

Option D - take a break: you can go on holiday and enjoy the winter break without thinking about markets for once. Good for you if you can.


* ‘beta’ is a measure of how much something moves vs the market: if your portfolio has a beta of 2x means that if the market rises 1%, your portfolio rises by 2%

** ARKK’s skewed downside vs upside is also a classic sign of unsuccessful risk management. You load a position, the stock drops, you cut it, and then the stock rallies. Believe us, it’s not just individual traders that suffer this kind of losses - it happens to pros all the time.