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Comparing Market Breadth To 2003’s Bull Market at Trader’s Narrative

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:

percent SPX above 150 moving average chart

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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5 Responses to “Comparing Market Breadth To 2003’s Bull Market”  

  1. 1 bob j

    the 2003 market finished an extensive consolidation period whereas the 2009 market has not consolidated which iIbelieves expalins the breadth discrepancies .

  2. 2 Babak

    bob, are you referring to the flag formation in the summer? The consolidation period started in late June 2003, by which time the breadth measure (mentioned above) already hit 90%+

  3. 3 Zee Man

    You wrote: “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.”

    Actually, I believe it is more a reflection of the degree to which the components of every exchange and every index (the S&P 500 included) fell in the 2007-2009 bear market compared to the 2000-2002 bear market. The latter was primarily a bear market in tech stocks. While it was going on there was actually a bull market in quite a few sectors. From 3/24/2000 to 3/17/2003 79% of the 49 industries tracked by Fama French had a positive return. In contrast to tech, industries like Personal Services experienced an equal weighted gain of 264%, while Precious Metals had a gain of 192%.

    Over 90% of the S&P 500 components were above their 150 day moving average by 6/2/2003 from the low of 3/17/2003. But if you consider the 10/9/2002 low as the actual bottom, the distance to June 2nd is much longer. This time the S&P 500 had more than 90% of its components above their 150 day moving average on 7/24/2009…. about 4.5 months out from the low of 3/9/2009.

    So I would venture to say it was not a small subset of the S&P 500 that has participated this time around… but rather, the fact that so many of them had fallen so far it took a bit longer to get them back above their 150 day moving average.

  4. 4 Babak

    Zee Man, except that during the 2007-2009 bear market from October 2008 to April 2009 the percentage of stocks above their 150 moving average remained very low (below 10%!!). That is a very long time to remain ‘oversold’. This would allow the 150 moving average for stocks to catch up to current prices and therefore, make it easier to climb above it. Compare this to the short time that it spent below 10% in 2002.

  5. 5 Zee Man

    Compared to 2003 I’d agree. But it takes a lot farther lookback to arrive at a period that is comparable. I did a count of how many market days were spent with the percentage of components in the NYSE below the 150 moving average on the final bottom looking back three years. At the bottom this time (March 9, 2009) that comes out at 87. You have to go back to 10/3/1974 to find one close — at 77. If you go back to 3/31/1938 you find one that exceeds it at 131. And on 6/1/1932 you find one that reaches 261. So the #s during the great depression and immediately after were much worse.

    BTW — at the bottom in 2003 there are just TWO cases when the NYSE had a percentage below 10%.

    But how long did it take to reach 90% from these past cases — cases that are much more comparable to this one.

    6/1/1932 bottom: hits 90% on 8/22/1932 just 2.7 months later
    3/31/1938 bottom: hits 90% on 7/1/1938 just 3.06 months later
    10/3/1974 bottom: hits 90% on 2/21/1975 4.7 months later
    3/9/2009 bottom: hits 90% on 8/13/2009 5.23 months later

    So it is true that all of the historical cases took less time to reach 90% than this time.

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