Market Breadth Weakens: Piper Sandler Advises Caution

Piper Sandler has issued a caution against increasing equity exposure, citing a deterioration in intermediate-term market breadth and momentum. This advice comes despite observed gains in specific sectors within the US stock market.

The firm highlighted a divergence in performance across major indices on Tuesday. The S&P 500 experienced a decline, while its equal-weighted version saw a slight gain, indicating uneven market performance. The communications sector advanced, moving above a key technical resistance level.

Technology stocks presented a mixed picture. Semiconductor stocks, tracked by the SMH ETF, fell significantly amid AI safety concerns. Conversely, software and cybersecurity shares surged, with CrowdStrike reaching a new record high.

Despite these sector-specific advances, broader market participation measures have weakened. Piper Sandler's indicators suggest more stocks are in weekly downtrends than uptrends, and the proportion of market groups in defined uptrends has decreased. This weakening breadth is a key concern for the firm.

Economic factors such as rising bond yields and commodity prices are also influencing the outlook. The US 10-year Treasury yield briefly surpassed 5.0%, and crude oil prices approached $105 per barrel. Piper Sandler indicated that sustained increases in Treasury yields towards 5.31% could exert downward pressure on equity valuations.

In light of these deteriorating breadth indicators, AI safety warnings, and rising Treasury yields linked to higher oil prices, Piper Sandler recommends patience. The firm advises waiting for an improvement in overall market participation before making significant increases to equity exposure.