Market Breadth Collapse Intensifies: Monitoring for Countertrend Setups with Asymmetric Risk/Reward
The latest internal market data shows a broad collapse in demand and increase in selling pressure across all major S&P 500 sectors.
The percentage of stocks trading above key moving averages—from 5-day to 200-day—has declined sharply. While short-term trend damage is now widespread, we’re beginning to see conditions where countertrend setups with convexity potential may form.
It’s a signal to prepare for an eventual countertrend.
At Shell Capital, we've been tactically trading for more than two decades. When this kind of environment takes shape, we pay close attention because it sets the stage for asymmetric opportunity.
Uptrends in the S&P 500 Stocks Have Vanished
In the sector snapshot, seven sectors have zero percent of their stocks trading above the 5-day and 20-day moving averages. Technology, Energy, Materials, Industrials, and Communication Services are effectively in a state of internal collapse. Even Consumer Discretionary and Financials show only marginally better participation.
That kind of uniform breakdown is rare—and when it happens, it often reflects short-term downside exhaustion occurring as those with a desire to sell are selling, and eventually they've all sold.
Longer-Term Trend Structure Is Breaking
Looking further out to the 100-day, 150-day, and 200-day moving averages, we see that most sectors are structurally deteriorating.
Only Utilities and Communication Services have more than 30% of their stocks above the 200-day average.
Sectors like Technology, Energy, and Materials are below 10%.
This confirms that the trend damage is not just short-term—it’s now impacting long-term structure across the market. It's also important to note the more defensive sectors were initially holding up, but have now collapsed, too.
It indicates the current downtrend is likely going to eventually expand into a longer-term trend.
Even in a long-term bear market, there are shorter-term, potentially tradeable countertrends along the way.
Where Convexity Conditions Are Forming
I pointed out in Forced Systematic Selling Eventually Drives Asymmetric Opportunities for Convexity we believe there remains some selling pressure from systematic trading programs. So, exhaustion of their forced selling could eventually be overtaken by buying demand if prices have been pushed down to a low enough point to attract enthusiasm.
These extreme breadth readings create the conditions for convexity. When selling pressure has already washed out the majority of a sector, a small input—such as a shift in sentiment, a macro surprise, or even short-covering—can result in a disproportionately large move.
That’s convexity.
But convexity by itself doesn’t make it a trade. It creates the potential. The next step is structure.
Convexity vs. Asymmetry: The Distinction That Drives Our Discipline
At Shell Capital, we say convexity describes the shape of a potential move. Asymmetry, on the other hand, is how we engage with that potential to structure a position with positive asymmetric risk/reward.
Convexity is a setup condition.
ASYMMETRY® is the strategy.
Convex setups emerge when the market becomes one-sided—where most participants are already de-risked or short, volatility is elevated, and very little buying can lead to a lot of movement. But that only becomes meaningful when we can define our downside and leave the upside open.
Asymmetric investment returns don’t come from forecasts. They come from structure.
- Limiting downside through predefined exits, stop-losses, or options
- Positioning for exponential or uncapped upside
- Repeating the process with discipline and consistency
This is how we operate. It's what we call ASYMMETRY®.
It's also essential to realize markets can always crash harder and stay down longer.
Sector Highlights
Technology, Energy, Materials, and Industrials now exhibit the most extreme internal breakdowns. These sectors have the highest potential convexity—if selling pressure exhausts. Health Care and Real Estate are weak but not fully washed out. Utilities remains a relative strength leader and may act as a defensive rotation magnet rather than a countertrend candidate.
This divergence between sectors helps us identify where potential setups may emerge and where capital may rotate next.
The Bottom Line
The market’s internal breadth collapse has intensified. While we are not yet seeing clear signals of reversal, the structure beneath the surface is setting up the conditions where asymmetric opportunity may form.
It's not about predicting turning points—it's about structuring positions only when we can clearly define risk and leave upside open. When market prices have already collapsed, it just increases the probability we'll eventually see a tradable countertrend move. We base it on decades of experience tactically operating through these changing conditions and the systems we've developed along the way to quantify risks and rewards.
I think we'll eventually see the selling pressure dry up, and then we'll look for confirmation buyers have taken control. From there, we'll see if follow-through is enough to drive a sustained uptrend or if it instead reverses back down to a lower low as it did before, as I discussed in The Stock Market Risk/Reward Asymmetry Has Shifted.
However, in the longer view, the probabilities have increased significantly the U.S. economy will enter a recession, which also increases the likelihood of a longer sustained bear market. Even though we should see at least a short-term countertrend move, the odds are high it'll eventually reverse back down to an even lower low. Since it's probabilistic and never a sure thing, it's essential to dynamically mitigate risk with predefined exits or hedging to limit drawdowns.
Mike Shell
Mike Shell is the founder and chief investment officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios, a separately managed account program with trade execution and custody at Goldman Sachs Custody Solutions. Mike Shell and Shell Capital Management, LLC, a registered investment advisor focused on asymmetric risk-reward and absolute return strategies, and profivides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.