Global markets have been on a roller coaster ride since the coronavirus pandemic came to light. After a sharp sell-off in stocks to close out the first quarter of 2020, stocks have increased substantially over the last few months. The S&P 500, NASDAQ composite, and Russell 2000 indexes have all recovered substantial ground and even made new all-time record highs in some cases.
While the broad market has recovered, there have been several worrying signs that market breadth may not be as healthy as before. Breadth describes how many different stocks are participating in the overall market’s move. A lack of breadth can indicate that a rally is not based on fundamental strength, but rather on only certain stocks pushing the market higher.
Fortunately, hopeful market breadth signs have started to emerge. Money has begun to flow into new sectors and asset classes. Investors are no longer only favoring tech stocks and are instead looking for opportunities outside of what they are familiar with. For example, the financial sector and energy sector, two areas that have lagged the tech sector, have seen strong money flows. Additionally, money has also begun to flow back into small-cap stocks, which have typically led market recoveries in the past.
While the market breadth is improving, investors should remain vigilant and keep an eye out for any potential signs of unsustainable rallies. For example, some investors appear to be betting that the market has “bottomed” and that further losses are unlikely. It is important to note that the market could still suffer further losses in the future, thus investors should remain prudent with their exposure to volatile asset classes.
That being said, there are two stocks that stand out from the crowd and appear to be worth monitoring closely. These are the QQQ (an exchange traded fund that tracks the NASDAQ 100) and NVIDIA Corporation (a leader in the graphics processing unit industry). Both stocks have seen strong money flows in recent weeks and could indicate further optimism from the market.
In summary, the stock markets have been on an impressive run but market breadth concerns remain. Fortunately, hopeful signs have emerged as money has begun to flow into new sectors and small-cap stocks. While caution is warranted, investors should watch the QQQ and NVDA closely to gauge the strength of the current rally.