Analysts at Goldman Sachs Group Inc. (GS) disagree with naysayers who worry that the post-election advance in the S&P 500 Index (SPX) is too dense, or narrowly based, driven by just a few mega cap stocks. As Goldman says in its U.S. Macroscope report dated April 27: "Some investors worry that the index’s earnings and price rely too heavily on a small number of companies, making the broad market vulnerable to a potential shock suffered by one of those firms. In absolute terms, however, the level of “density” remains below the average of the last few decades."

Indicators of a Broad Advance

While the 10 largest S&P 500 stocks by market cap now represent 20% of the index, this is far below the peak of 27% reached in the year 2000, and slightly below the 21% average for the period from 1990 onwards, Goldman finds.

The top 10 stocks in 2017 have produced 37% of the total year-to-date S&P 500 gain through April 26, and the top five account for 28%, Goldman calculates. Looking at the data slightly differently, the gain for the full 500 stocks in the index is about 7%. Take out the top 10, and the advance for the other 490 stocks is 5%, pointing to a broad-based rally. In fact, the Goldman Sachs Breadth Index (GSBI), which measures market breadth on a scale of 0 (low) to 100 (high), is now at 58, well above its 30-year average of 35. (For more, see also: These 10 Stocks Are Fueling the S&P's Rise.)

The advance/decline index for the New York Stock Exchange (NYSE) currently is at a record high, Goldman says. The number of stocks that are rising increasingly outnumber those that are falling, suggesting a broad advance.

Goldman also gauges market breadth by comparing how close both the S&P 500 and the median stock therein are to their 52-week highs, on a percentage basis. The closer the percentage for the median stock is to that for the index as a whole, the greater market breadth is assumed to be. This metric shows that breadth has been rising for about 12 months, and now is above its average from 1980 onwards. (For more, see: A History of S&P 500 Dividend Yield.)

Looking Ahead

Increasing market breadth historically bodes well for small cap stocks, growth stocks and active managers, Goldman finds. However, if the analysis based on 52-week highs registers, within a 12-month period, a shift of five percentage points or more toward less breadth, watch out. Below-average returns typically follow, and market drawdowns, or declines, tend to be deeper than average.

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