Bad Breadth

Here’s the thing – breadth is sometimes important and sometimes not.

You can have a negative divergence, where the S&P 500 rallies toward a new high but the amount of stocks rallying with it lags or “does not confirm”. And then you can watch as the divergence resolves to the upside and all the people pointing to it (from the sideline) don’t know what hit them as the price index (the only one that pays) breaks out and away.

There are lots of ways to measure breadth. Some popular ones are:

*new highs vs new lows

*daily or cumulative advance/decline lines

*percentage of stocks above a given moving average

We’ll focus on that last one today.

In my chart, you’ll see S&P 500 price in the top pane, with measures of breadth in the two panes below:

breadth

If you were only looking at the percentage of stocks above their 50-day moving average during the recent October rally, the bulls would appear to have quite a bit to hang their hats on. This number hit a high above 80% during the final week of October and start of November.

If you had been looking at the percentage of stocks above their 200-day moving average, however, you’d be looking at a very different picture. With the S&P 500 within 1% of new highs this month, only 50% of its constituent components were above this longer-term trendline. Technicians would look at this metric and note a non-confirmation.

The good news is that the percentage of S&P 500 stocks above the 200-day has improved from the market lows in August and September. The bad news is its nowhere near where it was during the May peak in price, even though we’re almost there again.

In the short-term, breadth during the recent rally has been outstanding, with lots of stocks participating in the run up. On a longer-term time frame, however, it’s looking more like a bounce than a new leg for the bull market.

Of course, I’m over-generalizing here and there are other considerations. For example, the biggest stocks within the S&P 500 are probably more important to watch given their larger weightings. Breadth doesn’t necessarily trump leadership in the order of “what matters” the most.

 

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