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:
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:
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.
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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