Tracking Sector Breadth and Momentum

Market rallies powered by a handful of stocks are fragile. In the first half of 2023, the S&P 500 gained 16%, but the equal-weight S&P 500 (RSP) gained only 6%. Seven mega-cap tech stocks contributed over 70% of the index return. When rallies lack breadth, they're vulnerable to rotation—and investors concentrated in lagging sectors miss the headline performance entirely. The practical point: tracking breadth and momentum across sectors reveals whether market strength is durable or dangerously narrow.

Breadth Indicators (What Participation Actually Looks Like)

Breadth measures how many stocks participate in a move, separating broad-based trends from narrow leadership.

Percentage above the 50-day moving average:

This indicator shows what fraction of stocks in a sector are in short-term uptrends.

How to use it: Compare the S&P 500's price trend to its % above 50-day MA:

• Index rising + breadth >60%: Confirmed uptrend (healthy)
• Index rising + breadth <40%: Narrow leadership (fragile rally)
• Index falling + breadth <20%: Oversold bounce candidate

Example (Technology Sector, Q4 2022):

• XLK (Tech ETF) down 25% from July highs
• % of tech stocks above 50-day MA: 18%
• Reading: Deeply oversold, potential capitulation

By January 2023, tech breadth recovered to 65% before the index made new highs—breadth improvement led price improvement by several weeks.

New 52-week highs minus new lows:

This measures trend strength across a sector. Net new highs (highs - lows) above zero indicates more stocks making new highs than new lows.

The divergence warning: When a sector index makes a new high but net new highs are lower than the previous high, internal participation is narrowing. This "non-confirmation" often precedes corrections.

Advance-decline line (cumulative breadth):

The sector advance-decline line sums daily advancing minus declining stocks. When the A/D line trends up, breadth supports the rally. When it diverges negatively (price up, A/D line flat or down), the rally rests on fewer names.

Example: S&P 500 in late 2021:

• S&P 500 made new highs in November-December 2021
• A/D line peaked in early November and declined into year-end
• Result: January 2022 saw a 10%+ correction as narrow leadership failed

Relative Strength vs. S&P 500 (Sector Momentum)

Relative strength compares a sector's performance to the broad market, identifying leadership and laggards.

The calculation:

Relative Strength Ratio = Sector Price / S&P 500 Price

When the ratio rises, the sector outperforms. When it falls, the sector lags. The absolute value doesn't matter—only the direction and slope.

Tracking relative strength (practical method):

1. Create a ratio chart: XLK / SPY (Technology vs. S&P 500)
2. Apply a 50-day moving average to smooth noise
3. Rising ratio above its MA = sector in relative uptrend
4. Falling ratio below its MA = sector in relative downtrend

Sector relative strength example (2022-2023):

Why this matters: In 2022, chasing the lagging tech sector (relative weakness) would have cost you. In 2023, rotating out of energy at the wrong time (when it was still showing relative strength) would have been premature. Relative strength gives you a systematic way to identify when rotations are actually occurring—not when headlines suggest they might.

Sector Momentum Strategies (Systematic Approaches)

Momentum strategies systematically overweight sectors with positive relative strength and underweight laggards.

Simple sector momentum approach:

1. Rank the 11 GICS sectors by 6-month relative return vs. S&P 500
2. Overweight top 3 sectors by +5% each vs. benchmark
3. Underweight bottom 3 sectors by -5% each
4. Rebalance monthly or quarterly

Historical performance context:

Academic research (Moskowitz and Grinblatt, 1999) found industry momentum generates ~5% annual alpha before transaction costs. More recent data shows diminished but still positive returns, with sector momentum strategies outperforming equal-weight allocations by 1-3% annually over rolling 10-year periods.

Momentum with breadth confirmation:

A more robust approach combines momentum with breadth:

• Buy signal: Sector has positive 6-month relative strength AND >50% of stocks above 50-day MA
• Sell signal: Sector relative strength turns negative OR breadth drops below 40%

This filter avoids buying narrow rallies (few stocks participating) and catches deterioration earlier.

Worked example: Q4 2023 rotation

Warning Signs of Narrow Leadership (What to Watch)

Narrow leadership—when index gains come from a shrinking number of stocks—historically precedes corrections or extended underperformance.

Key warning signals:

1. Equal-weight vs. cap-weight divergence

Compare S&P 500 (SPY) to equal-weight S&P 500 (RSP):

• SPY outperforming RSP by >10% over 6 months = narrow leadership
• RSP outperforming SPY = broad participation (healthier)

Historical context: When SPY leads RSP by wide margins, subsequent 12-month S&P 500 returns average 4% below historical norms.

2. Mega-cap concentration

Track the combined weight of the top 10 S&P 500 stocks:

• Normal range: 20-25%
• Elevated: 25-30%
• Extreme: >30% (reached in 2020 and 2023)

When top-10 weight exceeds 30%, index returns become heavily dependent on a handful of names. Any rotation or multiple compression in those stocks creates outsized index impact.

3. Sector breadth divergences

When the S&P 500 makes new highs, check how many sectors are also at new highs:

• 8-11 sectors at highs: Strong confirmation
• 5-7 sectors at highs: Moderate participation
• <5 sectors at highs: Narrow leadership warning

Example (July 2023):

• S&P 500 made new 52-week highs
• Only 3 sectors (Tech, Communication Services, Consumer Discretionary) at highs
• 6 sectors (Utilities, Real Estate, Healthcare, Materials, Industrials, Energy) still below 2022 highs
• Reading: Extremely narrow rally, concentrated in growth/tech

4. New high/new low ratio

Calculate: (52-week highs) / (52-week highs + 52-week lows)

• 0.80: Strong breadth

• 0.50-0.80: Mixed
• <0.50: More new lows than highs despite index strength

When this ratio stays below 0.50 while the index advances, the advance is unhealthy.

Practical Breadth Monitoring Workflow

Weekly review (15 minutes):

1. Check % of S&P 500 stocks above 50-day MA (StockCharts, Barchart, or TradingView)
2. Compare SPY vs. RSP performance over trailing 1 and 3 months
3. Note which sectors are at 52-week highs vs. lagging

Monthly rebalancing trigger:

Consider sector adjustments when:

• Your overweighted sector's breadth drops below 40%
• Your underweighted sector's breadth rises above 60% with positive RS
• SPY/RSP ratio diverges by more than 5% over 3 months

Breadth data sources (free):

Sector Breadth Checklist

Essential (high ROI):

• Track % of S&P 500 above 50-day MA weekly
• Compare SPY vs. RSP performance monthly
• Note sector new highs/lows when index makes new highs

High-impact (systematic):

• Create watchlist of sector ETFs with relative strength overlays
• Set alerts for breadth thresholds (<30% or >80%)
• Track top-10 concentration quarterly

Optional (for active sector rotation):

• Build sector momentum ranking spreadsheet (6-month RS)
• Combine momentum with breadth confirmation filters
• Backtest sector rotation timing against buy-and-hold

Next Step (Put This Into Practice)

Calculate the current SPY vs. RSP divergence and assess breadth.

How to do it:

1. Pull up SPY and RSP on any charting platform
2. Calculate 3-month return for each: (current price / price 3 months ago) - 1
3. Find the divergence: SPY return - RSP return
4. Check current % of S&P 500 above 50-day MA (StockCharts symbol: $SPXA50R)

Interpretation:

• SPY leads RSP by >5% AND breadth <50%: Narrow leadership warning—be cautious adding to momentum leaders
• SPY leads RSP by <3% AND breadth >60%: Healthy breadth—momentum signals more reliable
• RSP leads SPY: Broad participation—equal-weight or small-cap tilt may outperform

Action: If current breadth is below 40% while the index is near highs, reduce single-stock concentration and ensure diversification across sectors—narrow rallies are vulnerable to rotation.