For much of the first half of 2024, conversation saw a small number of stocks representing significant portions of the market’s upside. In other words, market breadth was narrow and largely concentrated within a few mega-cap growth stocks.
As a result, small-cap stocks and the related exchange traded funds were largely glossed over by market participants. Over the past several months, smaller stock performance has perked up, providing ballast to ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS ). Resurgent small-caps could also signal broadening breadth, which could be a catalyst for funds like QQQS.
“Divergent breadth was a concern as the major cap-weighted benchmarks were reaching new highs in July, when we wrote that the correction risk was rising with the market approaching what has tended to be its most challenging time of the year. Just 10 stocks accounted for nearly a quarter of the ACWI’s market cap, the highest level of concentration in 30 years of data,” according to Ned Davis Research (NDR).
That scenario is changing for the better and it could bode for QQQS as the back half of 2024 advances.
Data Confirm Breadth Is Increasing
A modest decline over the past week notwithstanding, QQQS has been sturdy as of late. Over the 90 days ending August 28th, it gained more than 5%. Alone, the ETF’s recent performance is impressive. Adding in the fact that could be confirmation of wider breadth is all the more encouraging.
These are certainly positive signs. Investors should monitor whether or not concentration increases if markets rally in earnest.
“We will be watching to see if the concentration increases again as the market rallies. What it has indicated thus far is that rather than a rebound dominated by the megacaps, the recovery has been broad, with investors responding to central bank easing cycles and economic soft landing evidence,” added NDR. “Powell’s Jackson Hole comments only added confirmation to expectations that future earnings growth will be supported across markets and sectors.”
Experienced investors know that there are a variety of ways by which market breadth can be measured. Alone, any one of those gauges could reveal something positive (or negative) for an individual asset such as QQQS. That’s why, as NDR points out, it’s important to not put too much stock in a single breadth measuring stick.
“For confirmation that breadth has taken a sustainable turn for the better, we will watch to see if signals from the report’s longer term indicators send its aggregate reading above 50%,” concludes the research firm.
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