After last week's collapse in Facebook shares, Goldman's clients are hardly happy: after all, Goldman - which has a Buy rating on the stock - not only upped its price target from $205 to $225 back on April 26, which it then promptly trimmed back to $205 after the biggest value destroying event in history, but at the start of June explicitly said there was no danger of a bubble forming in tech stocks for years. And it's hardly only Goldman clients: as Goldman's David Kostin writes in his latest Weekly Kickstart, "FB ranks at the top of our Hedge Fund VIP List, with 97 funds owning it as a top 10 portfolio position"...
... although in a curious move, the bank also notes that investors that did own FB and sold following its results "apparently rotated into other stocks rather than holding cash; on Thursday the S&P 500 excluding FB rose by 10 bp, seven of 11 sectors posted positive returns, and share prices of FB’s FANG peer GOOGL rose by 75."
Yet while Goldman clients appear to have taken Facebook's collapse in stride, they are expressing another growing worry namely the "bad breadth", or increasingly more narrow leadership, of the market. We first noted this one month ago when we discussed that just the Top 4 stocks have been responsible for 84% of the S&P's upside in the first half of the year.
First forward 4 weeks, when Goldman's Kostin writes that the biggest concern expressed in client conversations has been the increasingly narrow breadth of the equity market in that "the top 10 contributors have accounted for 62% of the S&P 500 7% YTD return", and this even after Facebook's record plunge which also dragged down some of the other most prominent tech names.
Kostin continues:
Of these 10 stocks, nine are technology or internet firms. The Technology sector alone accounts for 56% of the S&P 500 YTD return (76% including Consumer Discretionary members AMZN and NFLX).
As a result, Goldman's proprietary "Breadth Index" currently reads 0 out of 100.
Other, more conventional measures of market breadth also show a recent narrowing. The next chart shows the distance of the S&P 500 from its 52-week high with the corresponding distance for the median constituent: "when only a small number of stocks act to lift the broad index, that gap turns negative and signals narrow breadth."
Think of this chart as the risk momentum behind market leadership names turns negative. Meanwhile, from a fundamental perspective, narrow market leadership typically reflects narrow earnings strength, which is often a symptom of a weakening operating environment. To be sure, there are several prominent examples of this occurring:
in addition to the well-known episode of narrow breadth during the Tech Bubble, previous narrow breadth markets occurred ahead of the recessions in 1990...