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A Very Rare Breadth Thrust Buy Signal From NDR




According to Mark Hulbert's recent article, a rare buy signal has been given from a breadth indicator followed by Ned Davis Research. The indicator happens to be one that we've discussed quite a few times here: the percentage of stocks trading above their 50 day moving average. Based on the description it seems that NDR is specifically looking at NYSE operating company only securities. Based on the widespread participation of securities in the rally, they are calling this a "breadth thrust". And it is very rare, having only occurred 12 times since 1967.

Thanks to the work done by Wayne, you should by now be well familiar with the current market phenomena of breadth thrusts. While Wayne's approach is based on advance decline statistics, the conclusion is the same.

I mentioned the fact that the percentage of S&P 500 stocks trading above their 50 day moving average was above 90% last month. But NDR disagrees with my take on this indicator as an oscillator that flags tops when it is at such extremes. While it isn't perfect, we can approximate the NYSE operating company only data by using the S&P 500 index breadth:

Click to see larger version in a new tab:
percent S&P500 above 50 MA Apr 2010

According to NDR the latest signal was on April 5th and before that the previous two signals were on May 4th and September 16th, 2009. As you can see on the chart above, the signals were also delivered by the percentage of S&P 500 stocks trading above their 50 day moving average. On the one hand I'm glad to learn something new and put aside an incorrectly held belief that extremes in this breadth indicator mark market tops. On the other hand, I'm puzzled as to how an indicator can be bullish at both extremes. That is when the percentage of stocks above their 50 day moving average reaches a high (more than 90%) it is a buy signal and when it reaches a low (less than 10%).

But I have been watching a similar indicator which has been telling us about the powerful breadth thrust: the percentage of S&P 500 stocks trading above their 150 moving average. As you can see, when this indicator is pushed above 70% and held there or higher for a sustained length of time, the market trends higher:

Click to see larger versions in a new tab:
S&P500 long term chart breadth thrust comparison Apr 2010
percent S&P500 above 150 MA Apr 2010

The last time we saw such an intense breadth thrust was out of the 2002-2003 bear market. As you can see, from mid 2003 to early 2004 the percentage of S&P 500 index stocks trading above their long term average was consistently high. The rally out of March 2009 has been similar but a bit more sloppy.

Cumulative Advance Decline
Most equity indexes are below their April 15th 2010 highs. The only exception is the Nasdaq composite and the Nasdaq 100 index (NDX) which closed today slightly higher. Even so, the cumulative advance decline line for the S&P 500 index has eked out a higher close. And so has the cumulative advance decline for the NYSE. So we continue to see a broad based rally taking breadth higher ahead of or concurrent with most major indexes.

New Highs
The other breadth indicator, the number of new highs continues to act very strong. Both the NYSE and Nasdaq new 52 week highs have recovered sharply and are very close to multi-year highs themselves. The 10 day moving average of new 52 week highs is especially strong for the Nasdaq. This is yet another sign of the same breadth thrust that is pushing the market higher. Historically, market tops have not formed during such pervasive positive breadth.

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7 Responses to “A Very Rare Breadth Thrust Buy Signal From NDR”  

  1. 1 Dr Bill Kiele

    Hi,
    In the last two cases, the initial ultra high thrust followed an ultralow flush. Comparisons against 50-day averages are quite easy should there be a quick (30-days) 8-10% pop in the index. The steepness of the rise since 11 Feb is actually quite breathtaking when viewed on an 18-month daily chart. It nearly matches the slope of the first month after 6 Mar 2009!!! That's why there is such a large number of stocks above the 50-day.

    This doesn't demane the valididty of the signal as bullish in any way. I've not known about Ned Davis Research's observations about such extreme breadth, but ut does put to the lie the notion that four stocks are driving the numbers (By the way, the Dr is a math one, and this is an area of math I find interesting. Not profitable (I can't make decisions), but interesting.)

    Regards,
    Bill Kiele

  2. 2 Daniel

    Stocks making new 52 week HIs tend to outperform.

    Stocks making new 52 week LOs tend to outperform.

    These are core econometric truths, tested over many decades.

    That dynamic is probably why your observation that this.. "..indicator can be bullish at both extremes; that is, when the percentage of stocks above their 50 day moving average reaches a high (more than 90%) it is a buy signal, AND when it reaches a low (less than 10%).." is true.

    Extreme strength generally portends strength; and extreme weakness portends reversal.

    Daniel

  3. 3 Newcomer

    I have no idea, but what are your thoughts on explosive use of ETFs (or other similar products linked to broader indexes or sectors) and their impact on Cumulative Advance Decline and New Highs?

  4. 4 biscosc

    Babak,

    "I’m puzzled as to how an indicator can be bullish at both extremes"

    Maybe this is because tops tend to be a process and bottoms tend to be an event? Therefore, in topping the extreme breadth will be on the far left of the topping pattern, which is not the ultimate top, and at bottoms you only get it on the panic low. Just a guess...

  5. 5 jrm

    "a rare buy signal has been given from a breadth indicator followed by Ned Davis Research. The indicator happens to be one that we’ve discussed quite a few times here: the percentage of stocks trading above their 50 day moving average."

    DO TREES GROW TO THE SKY ?

  6. 6 Wes

    Babak, I think there is a lot of confusion over indicators because we tend to look at them one at a time, or perhaps several at a time in the same grouping (psychological indicators, for example) rather than looking at them in conjunction with other independent indicators.

    As an example, right now monetary conditions are quite favorable as is market valuation. Not surprisingly, under these conditions extreme overbought conditions are actually bullish.

    When the market is overvalued and interest rates are high, overbought signals are just that, overbought, and a warning.

  7. 7 Zee Man

    First off, this indicator was developed by Dan Sullivan at The Chartist, not NDR. Secondly, someone is fiddling with the numbers. I calculated this myself using Operating Companies Only on the NYSE back to 1928. There are more signals than they are stating (I removed all new events within three months).

    These are all cases when the S&P 500 is at a new 52 week high:

    http://www.zeelotes.org/90_OCO_NYSE.PNG

    These are all other events:

    http://www.zeelotes.org/90_OCO_NYSE_II.PNG

    You'll note that from 1980 to present all returns are positive for 2 months to 12 months forward from the event dates.

    Most events follow major market bottoms.... 1980, 1982, 1991, 2003, and 2009. It is a breadth thrust because all boats tend to rise with the tide. It is a simple process of reversion to the mean.

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