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Breadth Divergences Between the NYSE & Nasdaq at Trader’s Narrative

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Last week I talked about how the breadth numbers for NYSE and Nasdaq can diverge quite a bit. Which means that if you’re watching just one of them, you don’t get the whole picture.

This can be especially problematic when we have the bond market making a strong trending move, which we’ve had recently. On June 7th 2007, just one day after I wrote about this, the NYSE advance decline numbers dipped into an extreme oversold reading of -2784. To show you have extreme this was, we didn’t see this sort of breadth even after the September 11th terrorist attacks.

The last time the NYSE advance decline approached such an extreme in recent history was May 7th 2004, when it hit -2926. So what was special about May 2004? After all, the summer intermediate bottom of 2004 didn’t happen until a few months after in mid August.

Well, as you can guess, May 2004 was another time when bonds were being dumped left, right and center and the yield was shooting higher. Then, the 10 year bond yield breached 4.87% and panicked everyone, just like it is doing now.

So, not surprisingly, all those bond-like securities trading on the NYSE got dumped. And that created the lopsided breadth numbers. Anyway, back to present day.

On June 7th 2007 the NYSE breadth was -2784. But the Nasdaq breadth was only -1725. Fairly low but not extremely so. To put that into perspective, the March 2007 bottom saw a reading of -2579 (for the Nasdaq advance decline).

Anyone watching just the NYSE numbers would have thought that we had arrived at a historically oversold level. And perhaps may have charged ahead and bought “the dip”. But the oversold reading was a mirage created by the changing nature of the securities traded on the NYSE.

I looked back only a few years and it seems that when the Nasdaq and NYSE breadth numbers both reach an extremely low level, it is much more probable that the market has reached a bottom. This is just a “back of the envelope” calculation, so don’t take it as gospel. To me though, it just makes sense. I’m going to take a deeper look and go back a few more years to see if this holds under different market conditions.

To see instances where both the Nasdaq and the NYSE’s advance decline numbers hit extremes, click to enlarge graph:
comparing nasdaq nyse breadth for market timing.png

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