Excuse me…You have Bad Breadth

To start, I wanted to bring you up to speed on two things:

  1. The final entry of the 4-part “Ask Us Anything” blogs will be posted in just a few days. I’m delaying that final entry because of my commitment to providing you, the good readership, with Bear-o-meter readings in the first few days of each new month.
  2. I’ve just posted a video identifying a few “dog stocks” to avoid. This video will help you understand what I am NOT looking for in a chart! I have a very special co-host on the show who is an expert on dogs- you’ve just gotta see this one! Click here to watch.

OK–lets talk about the Bear-o-meter for this month. We’ve had quite an influx of new readers over the past few months, so its a good thing that I provide a quick review of what the Bear-o-meter is, and why it matters. I’ll reprint my description from last month’s reading here:

The Bear-0-meter is a compilation of binary (quantitative) readings from the 12 indicators (truthfully, one of them is used in 2 differing ways, so its actually 11 indicators-but that’s semantics). These indicators fall under the broad headings of Trend, Breadth, Seasonality, Value, Sentiment, and Breadth-momentum. Each of the 12 indicators are assigned a score – which could represent a negative point, a neutral score, or a positive point. Add ’em all up, and you get a reading that lies between 0 – 8.

Note that there are 3 zones, where the lower scores represent an unfavorable risk/reward tradeoff, vs the higher scores represent favorable conditions. The meter is NOT to be used in isolation. It is secondary to trend analysis. However, if you have a condition where – for example – a potential trend break (up or down) appears on the charts (see my Online Course) – AND a coinciding score (favorable or unfavorable conditions) in the Bear-o-meter – you have a better chance of that move happening.

The illustration below illustrates this scale.

 

Bear-o-meter reads neutral

The meter moved from a very positive score last month, to a more neutral score this month. Clearly, the bullish risk/reward profile of last months reading was accurate, given the rally we have witnessed. Currently, the Bear-o-meter has a 5/8 score. The big change was seen in market breadth, which will be discussed below.

I’ll give you a brief conclusion before covering the analysis:

Trend is neutral to positive, sentiment is neutral, seasonality is positive, valuation is neutral, and breadth- momentum is neutral. Broad market breadth is alarmingly bearish.

To me, this change in breadth indicates that the rally we saw last month is more precarious. That doesn’t mean that 4100 cannot be taken out, leading into a bull market. But, there are signs of caution that we at ValueTrend are taking into our decision making right now. My reasoning for this caution lies below:

Excuse me…You have Bad Breadth

Two indicators provide hints of a narrow leadership board in the recent rally.

First: The broad based NYSE Advance/Decline tells a story. For the first time in a while, you can see that the S&P 500 (red line) has risen to test its last peak (4100-ish). BUT… the broad market breadth line (black) is diverging negatively. This can often be a heads-up on nastiness to come for the markets. After all, what you are looking at is a failure of MOST stocks to participate in the current rally. Unless that changes, you have an unsustainable rally.  Note how, just before the 2022 bear market began, the AD line flatlined which the SPX was rising –I’ve marked the trendlines on the chart. I posted this in my Bear-o-meter report in late 2021. It pays to pay attention to this blog, folks!

Second: The Dow industrials (red line) are taking out the last peak on the market near 33,500. But the Dow Transports (black line) are vastly below their last peak. This is a non-confirmation in Dow Theory, and it backs up what we see in the AD line above.

 

Next blog: Ask Us Anything Answers Part 4 – the wrap-up

2 Comments

  • Keith, I just watched your video and wish to ask a follow on question related to Nat Gas. My question is really around fundamentals, and perhaps Craig may be the best to respond.
    Q- What were the fundamentals that drove Gas up near $10 peak…. (I believe Russia’s invasion and the pipeline damage, and cold weather in Europe, etc).
    What caused it to drop down below $3? (I believe a warmer winter than normal, but maybe others?)
    What fundamentals would you expect to drive the price below $2 to form the potential bottom.
    Then finally what fundamentals would make it pop up from that bottom, that would make us want to buy.
    I liked nat gas in the past as it had volitility, so could be traded. A 50cent move at $2.5 is a nice 20% gain. At $1.50ish I gotta think it’s a no brainer to buy in.
    Thanks

    Reply
    • From Craig:
      The fundamental factors that influence the Nat Gas market are plentiful. I would say they are more plentiful than ever. The infrastructure to not only divert the supply Nat Gas for one location to another, but also to utilize alternate sources of energy. Whether it is nuclear, solar or wind. German energy consumption for example is again more reliant on gas and coal, not as much on solar/ wind. France has been taking nuclear power generation out for maintenance, more gas is required to produce electricity. Natural Gas Traders (Experts) spend there entire day analysing and forecasting the forward price and still struggle to be consistently correct.
      Circumstances that drove Nat Gas were as you mention Russia’s invasion and the impact of taking that supply out, what that would mean to Europe, Asia and others. Also around this time Freeport LNG was knocked offline. In one word the elevated price was caused by “Uncertainty”. The market adjusted and came to understand price in a new scenario. The weather conditions throughout Europe were not a dire as predicted, China forged relationships with several parties for gas, including Russia, and Freeport capacity being restored. These factors and more took the price down.
      It is normal for the supply/ demand balance in natural gas to gyrate back and forth during the year. Summer is oversupplied and nat gas is put into underground reservoirs. Winter season depletes those reserves. The influence of many factors contribute to the balance of natural gas market. Anyone of the factors I have mentioned have the potential to impact the price dramatically as do many other factors not mentioned.
      The one thing I believe you can count on is continued volatility in the nat gas market….with a strong set of technical rules good luck trading the volatility.

      Reply

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