In the rapidly shifting landscape of American financial markets, there has been a noticeable tension recently among investors about the performance of the S&P 500 index. Despite fears surrounding the narrowing breadth of the index potentially hindering its momentum as the Federal Reserve prepares to announce its interest rate decisions, bullish sentiments have not wavered. On the contrary, as data from Bloomberg reveals, it appears that investors are actively continuing to purchase equities.

The DVAN Trend Line, which is an exclusive analytical tool that assesses buy or sell pressure, remains in a bullish state. Over the past week, investors engaged in the stock market on multiple trading days, responding to the signals of ongoing buying activity. Even with a slight pause in price gains in recent days, the prevailing price and breadth trends have not shown serious signs of weakening. After achieving 57 record highs in 2024, the S&P 500 index currently sits less than 1% away from its all-time peak.

Andrew Thrasher, a technical analyst and portfolio manager at Financial Enhancement Group, remarked, “We haven't observed any evidence of declining breadth expanding, which means there’s no justification for a bearish outlook. Simply having a lack of bullish breadth isn’t sufficient to reverse into a bearish market. We require more bearish data to substantiate that—but such information hasn’t presented itself yet.”

This perspective stands in stark contrast to the market activity itself. The S&P 500 index has recorded a worrying trend: for twelve consecutive trading days, the number of falling stocks has outnumbered those that are rising. This occurs in a context where Bloomberg has noted that such a streak is the longest seen since 1996.

Conversely, while there is concern about the potential for the U.S. equity rally to stall out before the year's end—coupled with a decrease in the number of advancing stocks—Jim Reid, a macro strategist at Deutsche Bank, offered a different conclusion on Tuesday. He stated, “The only thing we can say for certain at this point is that the market is subtly but steadily transitioning towards the Magnificent Seven,” referring to the dominant tech giants: Nvidia, Apple, Amazon, Meta, Alphabet, Tesla, and Microsoft.

Sector dynamics are also painting a contrasting picture. The growth sectors—non-essential consumer goods, communication services, and technology—have rekindled their leadership in the market, led by the aforementioned tech giants. Meanwhile, sectors such as energy, materials, and healthcare have seen a deterioration in breadth, with many of their respective stocks falling below their 200-day moving averages.

To put things into perspective regarding the S&P 500 index, it managed to achieve significant gains in four of the past six weeks, seeing an approximate 5% increase since the U.S. election day. Nonetheless, it's intriguing to note that according to Bloomberg's data, the index has fluctuated within a mere 1% swing over the last 21 trading days, suggesting an underlying calm amidst what appears to be robust movement.

Investors are clearly beginning to gravitate back towards growth stocks. Despite the S&P 500 index's trend lines not yet confirming new highs for December, Stephen Suttmeier, a technical strategist at Bank of America, pointed out that the strong breadth associated with trading volume in the largest U.S. stocks suggests that substantial funds continue to be put into the market—an optimistic sign for bullish sentiment.

However, there is cause for concern. Currently, only a fraction of large-cap stocks are trading above their 50-day moving averages. What’s more, there has been a consistent decline in the number of stocks setting new highs in recent weeks, contrasting sharply with the broader market trends. This alarming trend often acts as an early signal of potential bearishness—a telltale lack of strength.

Thrasher further elucidated, stating that for declining breadth to truly reflect a worrying trajectory, there must be an accompanying rise in the number of stocks showing weakness—indicating price declines. As of now, however, traders have not experienced an increase in the number of declining stocks.

Eyes are now turned to the upcoming Federal Reserve gathering, scheduled for 3:00 AM Beijing time on December 19 (Thursday), where the interest rate decision and economic outlook summary will be revealed. Market expectations tilt towards the anticipation of a third consecutive rate cut, with officials likely indicating a slowdown in the pace of future rate decreases.

In this fluid environment of financial markets, Willie Delwiche, founder and strategist at Hi Mount Research, is gleaning keen insights as he monitors market dynamics. Currently, the sustainability of the upward momentum has become his focal point, especially as the equally-weighted S&P 500 index has underperformed relative to the market-cap-weighted S&P 500 for three straight weeks—marking the longest stretch since February.

Delwiche noted, “This indicates that investors are returning to the Magnificent Seven and serves as evidence of the deteriorating situation beneath the surface.”