General / Expert Commentary

Fisher Investments Reviews What Falling Market Breadth Means for Stocks

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher addresses fears related to market breadth—the percentage of stocks that drive the market higher or lower. Ken says those that fear “bad breadth,” meaning few companies lifting the stock market, often do not have their pessimism based on data. Ken says rapidly falling breadth is, historically, a very bullish feature.

While investors of old praise large market breadth as a sign of healthy market growth, Ken says wider breadth usually occurs in mid- to late-stage bull markets. Investors often see rising breadth as a positive surprise, leading to further bull market gains. Fears of narrow breadth, Ken says, are another brick in the “wall of worry” that bull markets climb in their early stages.

Transcript

If you've read me for a long time or watched my videos, you know that I've been an optimist on the stock market. And you know that all this year, 2023, I've been saying it's a bull market. I started saying that last fall. Pretty adamantly. And one of the things that I've always talked about at length, I mean, I made up this phrase decades ago, is that early in a bull market, you get this thing that I referred to as the pessimism of disbelief, which is all the people who were so scared about everything before and so determined that things had to be really bad, can't quite really believe stocks are going up.

Think it's got to be somehow disconnected from reality and temporary at best and will diminish and come up with all kind of yeah buts about why it is that the bull market can't go on. And another analogy that I've used is to the Pink Floyd song. All in all, each one of those is just another brick in the wall. The wall of worry that bull markets legendarily climb when they're new.

And we've gone through brick after brick after brick after brick since October. And one of those bricks that's been quite prominent in media just lately is the notion. That market breadth is bad. What does that mean? It means that a very small percentage of the stocks. Are leading the market up. And that over time it's been fewer. And this starts and it's a very old concept, but it's wrong and backwards. And a lot of ways this concept started back in the early 20th century from so called.

Chart technicians using advanced decline ratios, the number of stocks rising versus the number of stocks falling. And they intuitively believed without regard to the type of stock doing whatever that when. The advance decline ratio got smaller and smaller. Breadth was falling, the leadership was getting more narrow.

And when those few leaders finally toppled, the market would go over with it. That concept is pretty widely entrenched in our culture and the notion that bad breath is bad. Now, in reality, that all developed as a view before we actually had really good capability for data analytics. And if you actually play the numbers and you define breadth, which can be done slightly different ways as. The percentage of stocks leading the market up or down. Which is very parallel to the ad line.

You can go back quite a long ways in history with that. And you see that. A Very bad breath is actually bullish, not bearish. And when breadth falls hugely quickly, it's doubly bullish. Which is exactly what's happened. Now, if you go back to the end of 2022, for example, about. Two thirds of the stocks were doing better than they had over their prior 12 months. If you go to May 31st, that was down to 37% . The drop from December 30th. In two thirds to the 37. In May 30th is the fastest decline in measured history.

Just simply said, fastest decline in measured history. All of the other fast declines in measured history. And I've got a chart coming out in the New York Post on this to show you the data. All of them. Are just simply periods that are preceding by a little or. In the middle of early bull markets. If you look out six, 12 and 24 months later, stocks just routinely been much higher. The fact is, falling breath is thought to be bad going back to the early 19th century and the tradition that's in everyone's head.

They kind of believe you got to have everything rising to have it keep going. Sometimes stocks rise when everything is going. But a lot of other times you just have a few stocks. During the pessimism of disbelief that can rise through it, pulling the market up until people become more optimistic and then more stocks start to rise. And that is the common phenomena that happens after breadth falls really fast, like it has going into May 31st of this year. So what I want you to see is while everyone thinks bad breadth is bad, bad breath is actually bullish and fear of a false factor is always bullish because the fears in the market now and when it turns out to be false later, there's positive surprise, which is always bullish.

So I just want you to think that through in that this bad breadth thing is just another brick in the wall of worry that new bull markets or early bull markets like to climb. You can thank Pink Floyd for that. The pundits keep trying to mess with the investors. And I keep saying, hey, pundits, leave those investors alone. But I don't think Pink Floyd's going to listen to me. Regardless. What I want you to see is that this is a brick. That brick in the wall will get past like we did the so-called debt crisis, like we did the so-called banking crisis, like we did the fear that they couldn't elect a speaker of the House of Representatives like we did with the midterm elections, like we did with all the concerns about inflation being permanent, like we did with all of the concerns about recession, on and on and on.

All in all, another brick in the wall. And after this one, there'll be another 1 or 2, I'm sure, before we get to an optimal point for broader breadth, let me put that into a slightly different perspective. John Templeton, legendary guy, famously said bull markets are born on pessimism, grow on skepticism, mature on optimism and die of euphoria. The pessimism of disbelief is a crossover period between pessimism and skepticism into we get a little more through that and a little more into the optimism phase. It's harder to get that breadth to. Full out flesh out become broader. It will, but slowly with optimism. And when that happens, you're moving in more toward the middle of the bull market.

So thank you for listening to me. I hope this was educational. I hope you found it useful and I appreciate you hearing me. Thank you much. Subscribe to the Fisher Investment YouTube Channel if you like what you've seen, click the bell to be notified as soon as we publish new videos.

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