Pardon me, you have bad breadth

Just a quickie today.  In the recently sent research report (to VT Update newsletter subscribers) we spent a bit of time noting the importance of the composition and capitalization weightings within market indices such as the S&P 500. Our point was that market composition influences market returns.

With this in mind, I wanted to post a bit of research from Charles Schwab concerning the “guts” of the markets this year. Please take a look at the table below (YTD) with my highlighted points.


Here is what I would like you to take note of. In the left column (not circled) you will see the YTD returns for the SPX, NAZ, and Russell 200 (small caps). The next column is the YTD maximum drawdown from the peak to June’s low. The third column (also circled in red) shows us how the average stock (not the index, which is biased to certain names) did from peak to ultimate low this year.

In summary:

Drawdowns YTD, and From the High

SPX -13% YTD, 24% from the high
Nasdaq -19% YTD, 33% from the high

Average Member Drawdown from YTD High

SPX -30%
Nasdaq -44%

As you can see, the SPX saw a peak/tough 24% drawdown, but its “guts” (average stock) saw 30% drawdown. The NAZ saw a peak/trough drawdown of 33%, but its average stock was down a whopping 44%. This data tells us that the pain was worse in the bigger picture than the index losses were showing. The damage was deeper than what the composite index statistics tell us.

Another breadth indicator

Readers of the ValueTrend Update newsletter will have received our research report this week. The report covered the technical and fundamental considerations of todays markets, and reflects on the potential for a changing macro picture of the US markets. One of the observations we made from a technical perspective was that of the New High/ New Low indicators big-picture. The NYHL indicator measure ALL stocks making new highs vs new lows on the entire NYSE board. That indicator changed trend when the SPX moved into a parabolic rally over the 2017-2021 period. The indicator illustrates what the above data continues to tell us. That is – most stocks have not done as well as the cap weighted indices suggest.

A falling NYHL trend is not normal in a bull market. A bull market should see good participation by the stocks that comprise the broad based indices. Up until 2017, there was a solid balance of participation – swinging back and forth in a normal fashion. Those swings represent normal sector rotation from old to new leadership. The NYHL indicator have been screaming for the last 5 years that the conditions were / are not favorable for a bull trend, let alone the parabolic on the SPX, to continue. Here is the chart from our report – note how breadth was balanced from the beginning of 2003 to 2017. Thereafter, the trend was for declining breadth (less broad participation in New Highs – New Lows) on the NYSE. :



As I write this blog, the SPX is making yet another attempt at blowing through the 4170 resistance zone that I have noted in past blogs. Its tried to break the zone a couple of times over the past week with no luck. Perhaps this one will stick. The best way to determine an actual break is to see at least 3 days through that level. If it does manage to hold over 4170, continued upside may occur.

I expect to place some of our cash in the market. However, factors like breadth – discussed today – keep me cautious. Seasonality and the Fed meeting in September (rising rates anticipated) are factors as well. Do we really want to fight the Fed during the most dangerous months of the year? Finally, I’m reading that much of the recent buying (driving markets up) has been lead at least to some extent by short seller covering.

All in, my discipline may force me to add a bit back into the market. We’ll probably focus on value/staples/ etc (low beta) if that’s the case. Honestly, I would be far more comfortable buying after a big washout on the market that more closely resembles a traditional market bottom. Please read this blog for details on that pattern. There are times when things seem pretty clear on the market as to what we should be doing. This is not one of those times.



  • I’ve posted new videos recently, including a look at the NASDAQ. Next week’s video will cover the outlook for more aggressive growth stocks – stay tuned for that one. Here is the site to visit the video’s.
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  • So confusing, don’t fight the trend they say.

    It seems logical to me that the Fed would still aggressively hike the rest of the year but the markets think otherwise.

    Technically 4231 marks a 50% retracement for the s&p off its bottom, apparently very rare without a correction.

    • Thanks for that input Mark. I’m not a Fib guy, but the stuff I look at (including % stocks over 50 day SMA, which I didn’t mention on this blog) make me very cyclical about this rally. Still, a breakout is a breakout—I may be forced to dip a toe back into the water next week if it stays where it is–all I know is that I am not diving back in even if my system forces me to buy a bit.


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