# Opinion: The stock market is advancing without help from the FAAMNGs, which analysts say is a bullish sign

Stumble they did: Since early September, those six mega-cap stocks have lost an average of 8.7%, according to FactSet. And, yet, the bull market remains very much alive, with the S&P 500 higher today. What happened, and what does it mean for the stock market’s future?

That’s what I am discussing in
this column, which will become a regular monthly feature. In it I will focus on
an investment theme like this one that is receiving widespread attention from
Wall Street research firms.

What “happened” is that the bull market transformed itself from one led by just a few big names into one of the most broad-based rallies in years. The research reports I read almost universally consider this transformation to be a sign of underlying stock market health and strength. They believe it means the bull market will continue for at least a number of months.

There are a number of different indicators that research analysts point to as evidence of the market’s newfound breadth:

• The number of stocks trading above their 200-day moving average. Recently, Bespoke Investment Group reported, 89.8% of the stocks in the S&P 500 were doing so, which is “the highest level this breadth reading has seen in more than five years.” This past March, in contrast, the comparable share was below 20%.

• The same goes for broader market indices, such as the S&P 1500. CFRA Research is reporting that “96% of the 147 sub-industries in the S&P Composite 1500 [are] trading above both their 50-day and 200-day moving averages.” This shows that the breadth of the market’s advance has spread beyond just the 500 stocks in the S&P 500.

• Further evidence of this spread is that small-cap stocks and even micro-cap stocks have come to life. This is particularly significant, since these smaller stocks had lagged behind the large-cap stocks during many of the bull market rallies over the past several years. As Hayes Martin of MarketExtremes pointed out this week, the Russell 2000 Small Cap ETF is at a new high and the Russell Microcap ETF is at a two year-plus high.”

Over what time period is this widespread breadth bullish? Martin said in an interview that, from his research, he found that past periods of similarly broad breadth led to “particular strength … in the 6-12 month time frame.” Over the shorter term, however, “market returns have been less reliable” especially when “froth extremes are present.”

Are there ‘froth extremes’?

Unfortunately, Martin
says, now is one of those times of froth extremes.

I can confirm that
froth is indeed present. Consider the average recommended equity exposure level
among short-term stock market timers (as measured by the Hulbert Stock
Newsletter Sentiment Index, or HSNSI). Three weeks ago, when
I last reported in this space where the HSNSI stood, it was at the 45^th percentile of
the historical distribution since 2000. That meant that the market timers were
slightly less bullish than their average over the last two decades.

What a difference a few weeks make. Now the HSNSI is at the 95^th percentile of the historical distribution, well within the zone that contrarians consider to be extreme bullishness. Historically, the stock market has struggled over the one- to three-month horizon in the wake of bullishness this extreme.

Martin concludes
therefore that “the market’s performance over the next few months is
questionable” even as its intermediate-term outlook is favorable. What kind of
scenario is consistent with this picture?

Martin says that a perfect recent example is the “January 2018 interim top, when excessive froth led to a nasty two-month correction in the 10%-15% range. After this sharp pullback, the market advance immediately resumed.”

Mark Hulbert is a
regular contributor to MarketWatch. His Hulbert Ratings tracks investment
newsletters that pay a flat fee to be audited. He can be reached at [email protected]