Markets are Strongest When They are Broad

This week’s title echoes the first half of rule number seven from Bob Farrell’s classic “10 Rules for Investors”: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Bob is a legend on Wall Street, having spent nearly half a century at Merrill Lynch before retiring in 2004. I was fortunate to meet him last year, and his seventh rule continues to resonate with our work on market breadth. 

Rule seven underscores a concept we strongly believe in: breadth matters.  

When leadership narrows, risk rises. 

Current market conditions are not yet worrisome, but there is growing evidence that the recent rally may need a breather. Performance is increasingly concentrated in a handful of blue-chip names, while broader participation has begun to fade. At the same time, the S&P 500 is extended above its 60-week moving average — a setup that reminds us of rule number one: Markets tend to return to the mean over time. 

S&P 500 
The index bounced back from the prior week’s decline but fell short of new highs. It remains well above its rising 60-week moving average, with a z-score of 1.988 — nearly two standard deviations above trend. This suggests stretched conditions and a potential need for consolidation. 

Source: Optuma 

S&P 500 Equal Weight Index
In contrast, the equal-weight version of the index posted only a modest rebound last week. Though still above its rising 60-week moving average, it continues to underperform — a sign that leadership is narrowing. 

Source: Optuma 

NASDAQ 100 
The NASDAQ 100, home to many of the largest blue-chip names, managed to trade to a new high last week. Notably, it opened Monday at the week’s low and closed Friday at the high — a strong weekly reversal. 

The index now sports a z-score of 2.229, indicating it is extended above its rising 60-week moving average.  

Source: Optuma 

The Magnificent Seven 
You know the names: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Mag 7 stocks are arguably what Bob would consider “a handful of blue-chip names.” We created a simple, equal-weight, Mag 7 index strictly to illustrate their combined performance. Last week, the group hit a new absolute high and is approaching a new relative high. 

Contrast this performance with that of the S&P 500 Equal Weight Index and remember Bob’s seventh rule; when leadership narrows, risk rises. 

Source: Optuma 

Final Thoughts
This note is by no means meant to sound an immediate alarm bell. However, as strong believers in the importance of market breadth, we are acutely aware of what is happening under the surface of the market, and we are monitoring the situation closely.  

And, for those who are interested in all 10 of Bob Farrell’s Rules for Investors: 

1. Markets tend to return to the mean over time. 
2. Excesses in one direction will lead to an opposite excess in the other direction. 
3. There are no new eras – excesses are never permanent. 
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. 
5. The public buys the most at the top and the least at the bottom. 
6. Fear and greed are stronger than long-term resolve. 
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. 
8. Bear markets have three stages – a sharp down, reflexive rebound and a drawn-out fundamental downtrend. 
9. When all of the experts and forecasts agree- something else is going to happen. 
10. Bull markets are more fun than bear markets.

Dan Russo, CMT 

READ ALL RESEARCH BY POTOMAC CONTENT HERE. 

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