Market breadth is a measurement of the level of participation by the broader arena of stocks that trade on an exchange, vs an index. Or, it can look at the individual components of that index, and measure the stocks participating in a movement on a percentage basis. Either way, when you look at a breadth indicator of any sort, you are trying to see if an index is rising on a concentrated group of names (or sectors) vs a broad group of participants. One exception to that observation is when you look at the New high/ New low line, which I like to use as an overbought or oversold indicator. I’ve discussed that indicator in prior blogs, and at my recent MoneyShow talk which you can watch here I won’t be discussing it on today’s blog.
Generally speaking, most breath indicators are showing declining participation in the recent rally. It’s only been a short time – so we don’t want to react too quickly to this signal– this differs for the period leading up to the May highs on the market, where breadth was horrid for months on end. I blogged on breadth a few times in the spring, including a write-up on Dow divergence –which is a big-picture forward looking breath indicator – here’s the blog . BTW—Dow divergence is also happening at this time – that is, transports are underperforming the industrials. Here’s the chart:
Below is a chart for the broad NYSE—all stocks that trade on the NYSE. Its reflecting that less stocks are participating in the current rally, as indicated by the current level, which is 7.5% below its May highs of 11,250.
Compare that to the S&P500 index which of course is a focused index containing only 500 stocks. The S&P500 is only 2.5% off of its May highs of 2130 at this point. That’s quite a discrepancy.
The % stocks above their 50 day (red/black line) and 200 day (orange line) moving averages below shows us deterioration in breadth even over the rally that occurred during October.
The cumulative Advance Decline line (www.freestockcharts.com) also shows us a few disturbing points surrounding breadth – specifically, as the S&P500 heads towards its old highs, the A/D line does not – and it – like the % over MA indicators noted above- has been stalling over the October rally.
All in, I’m becoming concerned about the current lack of participation by stocks in the current rally. Clearly, this is either a sign of a pending period of stagnation, or correction. My bet is that of stagnation—given the bullish seasonal factors. I also think that the decline in market breadth adds further credence to my belief that sector rotation is the name of the day. This is where smart individual investors like you, and small nimble Portfolio Managers like ValueTrend can really take advantage of the opportunities. Investors, Advisors and big Portfolio Management firms who don’t trade and rotate through these changes will be left for dead if markets gyrate as I suggest may happen.
Keep reading this blog, and keep your eyes open for the coming rotational opportunities you can take advantage of. Just as importantly, look to sell sectors and stocks that round over technically, and avoid the pain that the markets will deliver to those who operate like it’s still “the good old days” of buy and hold.
Special BNN show with Keith Richards next Thursday 6:00pm
Despite the fact that I was just recently on BNN, I’ve been invited to participate in a special week of top BNN MarketCall guests next week. The entire week is featuring MarketCall’s most popular guests . I feel privileged to be participating in the event, given the high quality of all of the guests that go on the show. My appearance is for next week – Thursday November 19th at 6:00pm. Be sure to mark this one in your calendar.