The market’s breadth is improving as more stocks join rally

The S&P 500 has risen 7.1% in 2023, with last year’s worst performers bouncing back sharply to lead the way. Some of the bellwethers of the U.S. stock market, including Meta Platforms Inc., Apple Inc. and Microsoft Corp., have broken through their long-term trend lines in recent sessions.

Plus, a widely followed technical indicator for market breadth last week hit a level not seen in more than a year. The share of S&P 500 stocks closing above their 200-day moving averages rose Thursday to 78%—the highest since September 2021, according to Dow Jones Market Data.

Investors and market strategists typically see a broad push higher as an indication that a rally has legs. When stocks across the market are rising, indexes are less vulnerable to a downturn if a specific sector falls.

“It feels like someone is trying to hold a basketball underwater," said Jeff Kilburg, founder and chief executive of KKM Financial, of the burgeoning rally. Mr. Kilburg says that he believes stocks will keep climbing and that the market is entering a different environment from last year due to the possibility that interest rates will ease.

Stocks have rallied to start 2023 in large part because investors are wagering that moderating inflation could put the Federal Reserve on track to cut rates later this year. Central bank officials, however, have repeatedly said their work to cool the economy is far from over.

Last week’s surprisingly strong jobs report caught some investors off guard and forced them to reconsider the trajectory of interest rates. The major U.S. stock indexes fell Friday and Monday as investors worried that a resilient economy might push the central bank to keep tightening monetary policy more than expected.

The recent declines marked a pause of sorts from an otherwise robust rally in 2023. The S&P 500 last week hit an indicator known on Wall Street as a “golden cross" that can signal further upside. The broad stock index’s 50-day moving average on Thursday closed above its 200-day trend line for the first time since March 2022, according to Dow Jones Market Data.

Some analysts see the recent technical milestones as an indication that the rally in stocks is part of a longer-term push higher, not just a temporary blip in the market downturn.

Ari Wald, head of technical analysis at Oppenheimer, said the swath of stocks taking part in the market rebound, led by shares of growth-oriented companies, constitutes what he sees as the “hallmark of a new bull market."

“We’re seeing strength in the soldiers, and the generals are now joining the rally as well," he said of the broader market and megacap tech stocks.

Some of the most heavily weighted stocks in the S&P 500 are among those leading the index higher. Tesla Inc. was one of the biggest laggards last year, but is up 58% this year. Amazon.com Inc., another major detractor in 2022, has surged 22%. Google parent Alphabet Inc. is up 17%.

Communication services, consumer discretionary and information technology comprise the top-performing sectors of the S&P 500 this year, with each rallying double-digit percentage points. The only sectors sitting out the rally in 2023 are utilities, healthcare and consumer staples, all of which are considered defensive plays, where investors hide out during market downturns. Energy, last year’s winning segment, is down as well.

Mr. Wald said investors should buy pullbacks in share prices, rather than sell on strength, in this market environment. His firm’s favored sectors are industrial, financial and technology stocks.

Other money managers and strategists aren’t yet ready to call a market bottom.

Katie Stockton, founder of Fairlead Strategies and portfolio manager of the Fairlead Tactical Sector exchange-traded fund, said she believes the market is at a proving ground as she looks for stocks breaking out above their 200-day moving averages to hold those levels. Ms. Stockton said her fund remains defensively positioned with a focus on Treasurys, gold and energy.

“We want to make sure that it can hold up here to give us confidence in the sustainability of the rally," she said.

From a contrarian perspective, the strengthening breadth and momentum indicators could signal that stocks’ ascent is overextended, Ms. Stockton said. She says she believes investors may be getting complacent as they chase the market, pointing to depressed levels of the Cboe Volatility Index, or Wall Street’s fear gauge. The VIX last week closed at the lowest level in more than a year.

Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, said he thinks that the market rebound is likely to be short-lived as monetary tightening continues, but predicts stocks could continue to move higher in the next few weeks.

“Investors don’t want to fight a market that is showing undeniable short-term momentum," he said.