How to play a low breadth market breakout

January 22, 20246 Comments

The S&P 500 broke its 4820 resistance point I spoke about last week. It hit an all-time high in the process. Breadth, unfortunately, is not supporting the move. This market is, once again, looking like a one-trick pony show. This is the same pony that lead the market before the 2022 bear market. Lets look at that today. Do we play the rally?

NYSE Composite

NOT a new high…

S&P 500 equal-weight benchmark

NOT a new high…

Midcaps & Smallcaps

NOT at new highs…

AD Line

NOT at new highs…

It’s been 114 weeks since the NYSE all-issue daily cumulative advance decline line made a new high (November 2021).

 

Relative performance

While the headlines read how the S&P 500  made a new high last week, only one sector has actually managed to achieve that status. Guess what? It’s Technology. Surprise! The other 10 sectors are still off their peaks, with the average down -12.5% and the median down -10.0%.

This has been and remains a mega-cap technology bull market. The one-trick pony market.

 

Conclusion

“When stocks are at all-time highs – equity market breadth should NOT be this weak. CCCs should be a lot tighter (lower in yield) and the VIX futures curve should be a lot steeper. There is NOT a lot of buy-in to this equity market rally. It’s more of a Vegas-juiced Cirque du Soleil call-buying festival than real investing.” Larry McDonald (BearTraps)

The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. Roman Emperor Marcus Aurelius

My thoughts: Technically, the bulls jumped on the breakout on Friday. The low of that day was 4785. I’d say, so long as that low holds, this breakout will remain in motion. Newton’s First Law of Motion states that an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.

If the SPX remains ahead of 4820, and/or does NOT BREAK 4785 by any significant level, we must assume the pony show has a while longer to go before the curtain closes. Breadth matters, but trend trumps all. This week should be telling.

 

6 Comments

  • If you have to wait weeks to see if this is a confirmed breakout, do you not risk missing a good portion of the breakout. The market could move up very fast.

    Reply
    • True–not sure if you took the online course Dave, but one of the principles I cover in detail is how VT buys (and sells) stocks. In a nutshell, we put a toe in the water (1/3rd position we want to invest) after 3 days, then do another 1/3rd a week later, then the last 1/3rd 1-2 weeks after that.

      Reply
  • I want to say thanks for continuing doing these regular posts. I always look forward to reading them. I find it super helpful to have your professional analysis of the always changing ebbs and flows in markets .
    Harry

    Reply
  • I don’t get it. Lots of industrials and consumer discretionary are doing much better (albeit more often in the growthier names), but we’re still dealing with this problem of lower valuation stocks not getting love.

    From my reading and experience, I believe markets often have a ‘character’ like a size or style preference, but is our current situation unusual to you? It’s like the cap-weighted indices just keep ramping up while leaving companies with great earnings and valuations behind. We’re taught that this isn’t ‘healthy’ but then how can one sit it out, either?

    Reply
    • Outstanding question Paula. True, you don’t fight the tape. The trend is your friend (no matter how irrational)….until it ends. Thus, we must not fight the tape, but we should absolutely be aware of the backdrop of any market.
      Understand that every market correction, crash or bear trend is set up by an “irrational exuberance” by investors. Many examples – but to name a few: -The bull then crash lead by the “Nifty Fifty stocks” in the 1970’s.
      The late 1980’s Japanese market pushed by land prices, leading into bubble stock prices then a crash in 1990 (eg 1986 say a 45% market return on the Nikkei).
      The 2000-2001 tech bubble & crash.
      The early 2000’s – 2008 oil bubble (peak oil theory) leading into a crash in 2008.
      And of course at the same time as that, the massive land-driven market leading into subprime mtg lending and market crash in 2008-9.

      Before each of these, there were plenty of opportunities to make money in the long lasting parabolic uptrends.
      As Trooper sang: “We’re here for a good time, not a long time”. How long the good times last is always the unknown. But trend tools like the peak/trough observations and 200 day SMA observations I teach can help get you out at a reasonable time. We did this in 2008 and in 2022. I believe you’ve taken my online course. Follow the rules presented there. They allow you to play most of the trend and escape with your skin still intact.

      Reply

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