Fu Peng: US stock market breadth under pressure; widening drawdown spread between equal-weighted and composite indices may reach a critical threshold.

On October 20, Bitfire Group Chief Economist Fu Peng (@fupenglondon) analyzed that while the US broad market index appears stable amid propping efforts by large-cap stocks, the vast majority of equities are undergoing deeper technical drawdowns. Meanwhile, market-cap heavyweights are maintaining elevated levels, supported by passive capital and concentrated institutional holdings.

He noted that when the orange line in the chart (the spread between equal-weight and composite drawdowns) breaches the historical extreme zone above 4% to 6%, it indicates that market breadth has been pushed beyond sustainable limits. At this juncture, even a minor correction among the giants could trigger a rapid, spike-like surge in the previously suppressed VIX. The recent widening of the equal-weight versus composite drawdown spread to a critical inflection point marks the exhaustion of US equity market breadth, triggering corrections to volatility suppression and distorted diversification premiums as actual volatility rises.