Trader’s Narrative

Here is a great illustration of the point I made earlier about how NYSE breadth numbers can be misleading because they are now skewed by interest sensitive non-common stock securities (such as bonds, CEFs, munis, etc.).

Here is a chart, courtesy of SentimenTrader.com, which shows the movement of the 30 year bond yield compared to the long term moving average of the NYSE advance decline numbers:

As you can see, they usually are mirror opposites of each other. When one is making a bottom, the other is making a top and vice versa. Of course, it isn’t a perfect correlation because the NYSE isn’t comprised of only interest rate sensitive issues. There are still many common stock securities which also have an effect on the breadth numbers. But it is obvious that what we are seeing is a blending of the two forces.

Here is a more up to date chart of the same showing the last 3 years:

I’ve mentioned several times that I prefer to look at Nasdaq numbers when it comes to breadth (in a non-cumulative way) because NYSE breadth numbers are “polluted” with non-common stock securities.

These are usually interest rate sensitive. They are municipal bond funds, bonds (yes actual bonds trade on the NYSE), CEF’s, and other weird and woolly financial concoctions.

The result is that these securities move like a great galloping herd. But they don’t move to the rhythms of the stock market. Rather, they take their cue from the bond market. So when you people get spooked about rates (thinking that we won’t see a rate cut or maybe even have a rate increase) these non-common stocks get clobbered.

And that effects the NYSE breadth numbers. Let me show you with one example. Here is the chart for BlackRock Municipal Bond Trust (BBK). Last week it sliced through its 200 day moving average (blue line):

Now look at the effect of moves like that one, multiplied by hundreds and hundreds of similar bond-like securities:

That is one really oversold market? Isn’t it? We are at the same extremes that we saw at the Feb-March 2007 market bottom. But are we really? Take a look at the Nasdaq advance decline numbers:

Oversold? What oversold? We are in neutral territory. And that is how the siren call of the NYSE breadth numbers can throw you off course.

If you’re interested to know how I trade these munis, take a look at My Year End Strategy.