The weak breadth of the market is starting to catch up. Shares fell on Tuesday as a decline in artificial intelligence names weighed on the major averages. As of midday trading, the Dow Jones Industrial Average fell as much as 459.62 points before paring those losses. The S&P 500 fell 0.7%, while the Nasdaq Composite fell 1.7%. Palantir fell by more than 7%. A possible precursor to this downturn may have been the lack of stocks moving higher. On Monday, for example, the S&P 500 ended the trading session higher even as more than 300 of its constituents closed in negative territory. That reliance on just a handful of tech names is making more and more investors concerned that a correction could be imminent if the big AI names fail to maintain their leadership or run out of momentum. “Some clients have indicated that the narrow breadth, despite SPX493's improving earnings, indicates increased fear and/or overvaluation,” according to a Tuesday note from JPMorgan's trading desk subtitled “Narrow Breadth Triggers Rotation away from US Equities.” “This could trigger a flight to safety (interest rates/credit) and/or to international options, especially if the USD resumes its decline,” the note continued. Here are some signs of declining market breadth: A comparison of the market cap-weighted S&P 500 (SPY) versus the equal-weighted index (RSP) shows that breadth is at its lowest since 2003. In October, the number of declining S&P 500 stocks exceeded the number of rising stocks in October. More and more companies are calling for vigilance. Craig Johnson, chief market technician at Piper Sandler, noted that the company's own breadth indicators point to “the potential for a sharp pullback or correction.” “Investors should be cautious in chasing greater upside potential in this concentrated rally,” he wrote, adding: “Reduce exposure to underperforming sectors and those breaching key support levels. Be vigilant with major tech stocks as a consolidation phase appears likely.”
