There are a number of factors that have us tactically concerned about a period of over-exuberance among equity investors. Those include record low put/call ratios and extreme inflows into equity ETFs. But among the more troubling facts of late is the breakdown in breadth we are witnessing even as the equity markets rally to new cycle or all-time highs.

If equity markets are making new highs all over the place, it would be really nice, if not necessary from an intermediate-term perspective, to see confirmation at the individual stock level. Instead, what we are noticing is the percent of stocks making new highs actually falling. At the end of the year there we saw about 20% developed market mid/large cap stocks making new highs on any given day (blue bars). Now, as we’ve raced to tack on a few more percent in gains in the indexes (index plotted in red), the percent of stocks making new highs has fallen back to 10%. Notice that we saw a similar setup in both early 2019 as well as late 2016 and in both of those cases equities pulled back by 5% before resuming their uptrend.

Perhaps more concerning is that the percent of stocks outperforming the broad market is also declining, meaning that the average stock is not doing quite as well as the indexes seem to suggest. The percent of developed market mid/large cap stocks outperforming the market was fully 55% back in October 2019. Now it’s only 44% and recently got to below 40% (blue line). From the chart below we can see that happened the last four times we saw a configuration like this. In 2016 it led to a 5% pullback, in late 2017 it led to a 10% pullback, in the middle of 2018 it led to a 20% pullback, and in the middle of 2019 it led to a 6% pullback. The index is plotted with the red line. Will this time be different?

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