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Hedge Funds, Market Breadth

Slim Pickings: Market Breadth Nearing Record Lows

Stan Altshuller Chief Research Officer

If you're like us, you might think that market breadth is bound to return. 2015, however, was a very tough year for stock picking.

The rise in income inequality in the US has a striking parallel in the capital markets. Declining market breadth means there are fewer and fewer companies responsible for overall market gains, and the lion’s share of index return is concentrated in ever fewer stocks. This makes picking stocks a daunting task for active managers, and stock pickers must sometimes crowd into the same names in search of few remaining pockets of alpha. In contrast, passive investment is agnostic of growth inequality. Since indices are market-cap weighted, a passive investor would benefit from the growth in just a few mega cap stocks, without the burden of having to pick the right ones. There are many other reasons why passive investing has outperformed active in the recent years, but the shrinking breadth of the markets is one definitive driver.

We are not the only ones to consider this concept important. Market breadth is a factor monitored by Goldman Sachs Global Investment Research, discussed in this BI article and widely followed by investors. And while breadth has been shrinking for winning stocks, we found that it has actually been increasing for the losers. Gains are shared by few, losses by many. Of course, we don’t think this will last forever. Let’s dissect the data.


Instead of using the S&P 500 like the GS Breadth Index, we’ll use the S&P 1500 to capture more of the market. In addition, we won’t use a normalized breadth score, rather we will calculate simple, intuitive indicators to measure market breadth for the winners and losers in the index. We looked at constituent data from 2005 to 2015 and split the S&P 1500 into winning and losing stocks for each year. We then summed up the total P&L attributable to winners and the same for losers. We calculated the portion of gains (and losses) attributable to the top contributors on each side.

Shrinking Breadth

Below is a chart of top 650 winners over the last three years. More concave lines represent shrinking breadth of the winners.

market breadth

From the chart above we can clearly see that more gains are concentrated in fewer stocks today compared to 2013. Now, imagine a cross section running at the 50% line for each year. This allows us to measure the number of stocks responsible for half of the total market gains and losses each year. Below are the results.

market breadth

To interpret this chart, take a look at 2008—clearly an outlier year. In 2008, only five stocks were responsible for (slightly more than) half of the total market’s gains! Walmart, McDonalds, Anheuser-Busch along with two others generated 44bps of P&L out of a total of 87bps for all of S&P1500 positive contributors. The pain, however was more uniformly distributed with 60 stocks responsible for half of all losing P&L. Something similar, though not to that extent, happened last year. In 2015, only 28 stocks captured half of the market’s gains – something Bernie Sanders might get riled up about. This is the second worst measure of breadth in a decade, worse than 2011 and behind only 2008. On the contrary, losses were almost as evenly distributed as in 2008. No wonder some managers refer to last year as a stealth bear market.

****Update Feb 9th 2016

Barry Schachter suggested a change to the above chart in his comment. He suggested we take a look at the winning and losing stocks responsible for half of the contribution, as a percentage of total winners and losers for each year. Here is the data visualized Barry’s way:

Share of Stocks as percent of total winners

Look at 2015. This means that 3.8% of all winners were responsible for half of the winning P&L – the lowest measure since 2008.

Market Performance Minus the Outliers

The concept of a stealth bear market is further supported if we look at the market performance without the top 10 and bottom 10 contributors. Instead of looking at the S&P 1500, we will focus on the middle 1480 stocks in the index, cutting off the extreme left and right trails of the distribution. Thus adjusted, market performance was lower than we realize in recent years. And doesn’t it make more sense for hedge funds trying to pick stocks from this universe?

market breadth

What Now

If you’re like us, you might think that market breadth is bound to return. It’s impossible to know exactly when this will happen, but it’s highly unlikely that we’re in a new normal of FANG-like market dominance in which a handful companies drive most of the growth. When breadth returns to the market, stock picking will matter again and active managers will be more likely to generate alpha from more diversified sources.

The Novus Guide to Win/Loss Ratio

A portfolio manager makes multiple decisions when managing capital, such as picking which securities to invest in, which geographies to allocate to, how to size each position, and how long to hold each position in the portfolio. All of these decisions impact returns and are a great window into a manager’s true investment acumen.

The win/loss ratio is a metric that helps quantify the efficacy of two critical decisions for managers: the sizing of trades and the timing of exits out of trades. In layman’s terms the win/loss ratio measures (on average) how much a manager makes when they’re right versus how much they lose when they’re wrong.

In this guide, we’ll focus on some basic observations and properties of the win/loss ratio. Download our latest guide for the most authoritative walkthrough of win/loss ratio and its applications.

What does the guide cover?

  • How win/loss ratio is calculated
  • Why it helps evaluate a portfolio
  • Ways to improve win/loss ratio
  • How win/loss ratio relates to batting average

Download our latest report to learn more.

the novus guide to win/loss ratio