Breadth Breakout Drives Market Higher As Investors Remain Skeptical

Despite the S&P 500 and QQQ achieving new highs in September, driven by a surging NYSE All Advance/Decline line, the market exhibits significant cross currents. A highly bearish AAII sentiment survey, with 21% more bears than bulls, presents a contrarian signal typically associated with market bottoms, not current peaks. Furthermore, while overall breadth remains strong, daily breadth for key indices like the S&P 500 and NDX100 turned negative on Friday, with the NDX100 A/D line showing lower highs, indicating potential underlying weakness despite headline gains.

Analysis

The market is exhibiting significant cross-currents despite major indices like the S&P 500 and Dow reaching new all-time highs, with the SPDR S&P 500 (SPY) and Invesco QQQ Trust (QQQ) gaining 2.1% and 2.9% respectively so far in September. A key bullish signal is the surging NYSE All Advance/Decline (A/D) line, which has made convincing new highs, indicating broad market strength. However, this is contrasted by notable underlying weakness and divergences. The A/D lines for the S&P 500 and NDX100 are merely range-bound, and critically, the NDX100 A/D has been making lower highs since July, suggesting weakening participation from market leaders. This was underscored by Friday's session, where breadth turned negative with 65% of S&P 1500 stocks closing lower. Further complicating the picture is the highly bearish AAII investor survey, where bears outnumber bulls by 21.2%, a level of pessimism historically associated with market bottoms, not peaks. This sentiment is inconsistent with current price action. Additionally, the BofA Global Research survey from July showed fund manager cash levels at a low 3.9%, a reading often seen before market declines, adding another layer of caution to the outlook.

Key Decisions for Investors

• Investors should closely monitor the divergence between the strong NYSE All A/D line and the weakening NDX100 A/D line, as a breakdown in the latter would serve as a primary early warning for a potential market correction.
• Treat the extremely bearish AAII sentiment reading as a potential contrarian signal, as such deep pessimism is historically inconsistent with market tops and could provide fuel for further upside if the trend holds.
• Note the technical breakout in QQQ above $583.32, which projects a move toward $615, but remain cautious given the low fund manager cash levels reported in July, which suggest heightened market vulnerability.
• Pay close attention to daily market breadth figures, as a continuation of negative A/D numbers, like those seen on Friday, could confirm a loss of momentum despite headline index performance.