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Back to everyone’s favorite game: is this the real deal of a new bull market? or is Mr. Market about to get another visit from gravity?
To try to answer this lingering question, I again turned to the lessons offered by the young bull market of March 2003. Here is a chart of the percentage of S&P 500 stocks above their 150 moving average:
The rally started in early March 2003 with eery similarities to the spring rally we saw this year. By June 2003, 90% of the constituent stocks in the S&P 500 index were trading above their 150 moving average. From then forward, the breadth remained incredibly strong. For about 9 months the percentage of stocks above their 150 moving average remained very high.
In contrast, this breadth indicator reached a high of 85.4% in mid June 2009 and it seems to have lost its mojo. But the weakness in breadth is even more pronounced when you consider the commensurate increases in share prices that lead to it.
We’ve had a remarkable 37.4% rally from March 9th 2009 to May 8th 2009 and since then we’ve gone sideways. If the March 2003 rally had taken the S&P 500 higher by the same magnitude, it would have reached 1105 by mid May 2003. Instead it was only around 940 - a mere 17% rally.
Put another way, the S&P 500 index’s slope of incline is about 5 times steeper. That is, in 2009 it rallied 37% in about 2 months while in 2003 it reached similar altitudes after about 10 months time.
But even after such a rocket ride, the breadth measure still didn’t manage to reach 90% - something which it did easily back in 2003 with much less gains.
So what this analysis tells us is that the recent rally was one where a small subset of the S&P 500 rallied, pushing the averages higher. To see a change in market tone, we need to see almost all shares trade above their long term moving average. We can not start a healthy bull market with a few extremely strong shares pulling the rest along for the rise. Eventually they will peter out and with the dead weight of the rest, the whole market will head lower.
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