Piper Sandler Urges Caution on Stocks as Market Breadth Deteriorates

Piper Sandler has advised clients to avoid aggressive equity exposure, warning that key indicators for market breadth and momentum are showing signs of weakening, according to a note published Wednesday.

The firm's cautious stance comes amid a complex market environment where major indices are being propped up by a shrinking number of stocks, a trend that often precedes broader market pullbacks.

A Narrowing Market

Evidence of a narrowing market was clear in Tuesday's trading, where the market-cap-weighted S&P 500 fell 0.48%, while the equal-weight version of the index edged up 0.04%. This divergence indicates that while a few large-cap names struggled, the average stock held its ground, pointing to rotation rather than widespread selling.

Piper Sandler's proprietary indicators support this view of deteriorating health:

• The firm's MACE trend analysis shows more stocks are now in weekly downtrends than uptrends.
• The percentage of industry groups in a defined uptrend fell from 53% to 43% in the last week.
• Both the 26-Week New Highs and 40-Week Technique indicators have shifted to sell signals.

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Sector Divergence and Macro Pressures

Performance across sectors was mixed. While the Communications sector gained 2.2% and broke above its 200-day moving average, the technology space was fragmented. Concerns over AI safety reportedly pressured semiconductor and infrastructure stocks, with the SMH semiconductor ETF falling 4.75%.

In contrast, software and cybersecurity stocks rallied, with CrowdStrike hitting a new record high. Meanwhile, macroeconomic headwinds are building, as the 10-year Treasury yield briefly surpassed 5.0% and crude oil prices approached $105 per barrel. Piper Sandler noted that a sustained rise in yields toward 5.2% would likely compress equity valuations.

Outlook for Investors

Given the combination of weakening market internals and rising external pressures from bond yields and oil prices, Piper Sandler suggests investors should wait for broader market participation to improve before increasing their stock allocations. The firm noted that the S&P 500 and Nasdaq are currently holding support near their 50-day moving averages, a key technical level to watch.