The market, you might say, has “bad breadth”. Not to be confused with halitosis, bad market breadth indicates that it is rising on less participation than may be ideal for continued support of a bullish trend.
Breadth can be measured in a number of ways, but I’ll focus on just a few of them today. One way to measure breadth is by measuring the percentage of stocks trading over their 50 and 200 day moving averages. These indicators have been declining since March, and particularly since the beginning of May. This tells us that the internal strength of both the US markets (S&P500) and the TSX 300 may be running out of steam (see my charts of the TSX and S&P500 % over 50 day MA’s on this BNN clip:http://watch.bnn.ca/#clip1087212 ).
I also watch the ratio of stocks on the NYSE making new highs vs. those making new lows—I’ve smoothed the chart below with a 40 day MA. This shows a declining trend since April. Less stocks making a new high (blue line, bottom of chart) when the S&P 500 composite index (top line, in red) is making a new high implies less stocks are participating in the fun! For example– only 23 stocks on the S&P500 (which represents less than 5% of the total number of stocks) made new highs on Friday, while the S&P500 itself closed at a new high. This means that 477 stocks of that index didn’t make new highs. Yesterday, again with the S&P500 at a new high, only 47 stocks of that index made new highs.
Not surprisingly, the more narrowly focused DJIA and – more importantly — the larger scoped NYSE composite index itself failed to make new highs last Friday. We technical analysts like to call this lack of participation “divergence” of breadth – it can be a leading indicator of a weaker market to come. The last time this happened It lead into the end-January correction. Unfortunately, bad market breadth cannot be cured by chewing gum or mints.
Keith on BNN television’s MarketCall (Tuesday May 27th) : http://watch.bnn.ca/#clip1087212