Market breadth is becoming a major issue for the market after the outperformance of Big Tech names this earnings season.
The Big 7 stocks – Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta (META), Tesla (TSLA) – are up 31% year to date, while the rest of the S&P 500 (SP500) (SPY) is up 3%, according to BofA strategist Michael Hartnett.
Narrow breadth is “often dangerous,” Hartnett wrote in his weekly “Flow Show” note.
BTIG technical strategist Jonathan Krinsky also raised the breadth issue, noting the dominance of the top stocks in large-cap indexes that dwindles moving down to small-caps.
Hartnett said the zeitgeist is currently one of: “Impinj (PI), Mobileye (MBLY), Wolfspeed (WOLF), STMicroelectronics (STM), Microchip (MCHP), ON Semi (ON) … under the surface it’s starting to get scary, but we all know what the Big Tech horsemen can do to P&L before we blow up.”
Trouble with the curve
“For first time since 1981 every US yield curve (NYSEARCA:TBT) (NASDAQ:TLT) (NASDAQ:SHY) (NASDAQ:IEI) has been inverted for over 6 months,” Hartnett said. “And in (the) past 100 years the current 170bps of inversion in 3m10s yield curve (gap between 3-month (US3M) & 10-year yield (US10Y)) has been exceeded on just 125 days.”
Of the ten recessions in the U.S. since 1957, “each was preceded by tight monetary policy & inversion of 3m10s and/or 2s10s yield curve (gap between 2-year (US2Y) & 10-year yield),” he said. “On average, (a) US recession has started 6 months after inversion of 3m10s curve & 11 months after inversion of 2s10s.”
“In this cycle, the 3m10s inverted in Nov’22 … so recession should begin this month Apr’23; and 2s10s inverted in Jul’22 … so recession should begin May’23,” he added. “Inverted yield curves signal recession, but once recession begins the yield curve immediately steepens as market discounts Fed policy response to recession.”
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