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Adding to the chorus of negative notes regarding the state of the stock market is the current cumulative advance decline breadth indicator for the S&P 500 index. While the index has been able to stair-step higher, the breadth measure which gives us an indication of just how many individual issues are keeping pace is lagging.
The cumulative advance decline line for the S&P 500 topped out on September 20th when the market surged above the resistance line at 1130 which had kept it in check for the duration of the summer. The stock market index surged once again this week on October 5th, reaching a high of 1162.76 but the cumulative breadth didn’t keep up:
You can see from the chart that a similar scenario played out in late July to mid-August. That is to say, the S&P 500 index lead the cumulative breadth line. The result was a return back into the trading range. We’ve already looked at the overbought state of the market and the dearth of selling climaxes. This is just another reason to be wary.
If you’ve looked at the sector performances across the board, it isn’t surprising to see the flaccid advance decline line. The financial sector, as measured by the Philadelphia Banking Index (BKX) has been very weak, as has the Semiconductor sector (SOX). So unless we start to see an increase in the rate of participation across sectors and issues, this will be a problem for the budding rally.
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