Stocks' path to record highs is increasingly narrow. Why a selloff may be overdue.

By Joseph Adinolfi

Gains for Apple, Microsoft, Meta and Alphabet papered over losses elsewhere in the market on Tuesday

The S&P 500 and Nasdaq Composite marched to record highs on Tuesday - their 27th and 15th of 2024, respectively.

But beneath the surface, signs of weakness proliferated, as Apple Inc.'s (AAPL) mammoth gain drove much of the gains at the index level. Aside from a handful of megacap names like Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL) and Meta Platforms Inc. (META), most of the stocks in the S&P 500 SPX finished lower on Tuesday, FactSet data show.

Even Nvidia Corp. (NVDA), which has driven 34.5% of the S&P 500's advance in 2024, according to data from Apollo's Torsten Slok, finished lower on Tuesday.

Only two sectors were higher: information technology and communications services, both of which are dominated by members of the "Magnificent Seven."

That the market's record highs are increasingly being driven by an elite group of stocks has some strategists questioning whether a pullback might be overdue. Then again, market breadth has stunk for a while now, and it hasn't mattered much for the large-cap indexes.

Still, an unusual development emerged on Tuesday, one that has preceded previous market tops. In a chart shared on X, Grant Hawkridge of AllStarCharts, pointed out that record highs haven't often coincided with the number of New York Stock Exchange-traded companies hitting new lows outnumbering those hitting new highs - an unusual divergence.

During the previous two instances when this occurred, in late 2021 and late 2018, a selloff followed soon after.

As if this wasn't enough, Jason Goepfert, founder of SentimenTrader, pointed out on X that the number of rising stocks listed on the NYSE has been outnumbered by the number of falling stocks, while volume in shares that are falling has eclipsed volume in shares that are rising.

All three of these indicators firing in unison is even more rare. The last time it happened was at the market top in late 2021. Before that, it occurred a few times in the run-up to the dot-com era peak in March 2000.

In another sign of just how concentrated the market has become, Todd Sohn of Strategas noted that there are now three stocks in the S&P 500 that comprise more than 6% of the index, which has never happened before going back to at least 1990, according to Strategas's data. The three stocks are Microsoft, Apple and Nvidia. As MarketWatch reported earlier this week, these three stocks comprise more than 20% of the index's market capitalization.

Of course, past patterns aren't guaranteed to play out again in the future, and bullish investors have pointed out that the increasingly concentrated market returns are justified by fundamentals like torrid earnings and sales growth for megacap companies. They have also noted that in the past, stock-market records have tended to beget more stock-market records.

That appears to be the case on Wednesday following a May CPI report that was favorable for the market, with stocks and bonds rallying in unison.

All three major U.S. indexes - the S&P 500 SPX, Nasdaq COMP and Dow Jones Industrial Average DJIA - were trading sharply higher Wednesday morning.

-Joseph Adinolfi

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06-13-24 0602ET

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