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The Uncommon Common Sense
We had a breadth thrust this week: 10 of the 11 sectors that comprise the S&P 500 finished higher on both a market cap and equal-weighted basis. You may not have heard of this thrust, as it’s not one that’s been published in books and backtested a thousand different ways, it’s what I like to refer to as a “common sense” breadth thrust.
"Keep it complicated" — said no one, ever.
Markets are run by humans, and humans tend to overcomplicate things. We learn the basics, take them for granted, and immediately begin adding complexity. Forget the calories and macronutrients—this cheesecake is healthy because it was made with low-glycemic sugar that won’t spike my blood sugar. Oh, and the milk used for the cheese was lactose-free? Say no more! This might seem crazy, but we do the same thing in the market, overly complicating really basic principles that actually drive the bulk of returns. It’s why people often flex their intelligence but never their performance—because if the two were actually correlated, they would share both.
My goal is to keep it simple. Yes, I do use validated backtests, but the important part still comes down to context and execution. A breadth thrust is strong price movement broadly across the market, and that’s bullish.
Context: They Like to Skip This Part
While I don’t believe you need to make things complicated you do need to provide context. This “thrust” occurred within the framework of an underlying bull market (price above an upward-sloping 200-day simple moving average) that was in a short-term pullback, where the RSI stayed above 40. With this context, it’s easy to see that the thrust came at a logical point, where we could manage risk against $540 and swing the bat.
What’s Next: Breadth Tipping Its Cap?
In the short term, a thrust implies a period of slowdown in the future. After a strong push in price, it's common to see some additional volatility or backfilling, as markets digest the surge. Moving forward, this type of price action suggests that while we may see some short-term retracements or choppiness, the broader direction remains intact. During this period, rather than panicking, it might be more prudent to accumulate positions as others capitulate, especially if the underlying trend is still strong.
With breadth already making new all-time highs (ATHs) via the Advance / Decline line this week, the market may be tipping its cap to a Q4 rally and ATHs.
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Cheers,
Larry