Breadth Collapse Sparks Warning Signs for US Equities
Morgan Stanley's Mike Wilson has been vocal about his constructive outlook for US equities, but he recently pointed out a potential problem that should give bulls pause. According to Wilson, a key measure of market breadth has collapsed since Kevin Warsh's speech at Jackson Hole. This collapse is not just due to rising long-end Treasury yields or oil prices, as Wilson believes it's more about the additional policy tightening being discounted.
The chart provided by Wilson shows the share of S&P 500 stocks trading above their 200-day moving average versus the overall index. As Wilson notes, breadth has been expanding as crude and yields moved higher earlier in the summer, but this expansion has since reversed. Wilson remains confident that stocks can recover any lost momentum, but he emphasized that the divergence between breadth and the index 'needs to reconcile before the bull market fully resumes.'
The deciding factor for how this reconciliation plays out is rates volatility, which has remained remarkably calm during this recent breakdown in breadth and valuations. Wilson pointed out that the near-term question for equity investors is whether this spill over into equity volatility will occur.