Last week I suggested that market breadth doesn’t matter, until it does. By which I meant that inspecting every twitch of the cumulative breadth measure for the market isn’t all that useful.
Most of the time, this indicator is brought up because there is a “negative divergence” which then is used to argue that the market is floating on air and will come crashing (or correcting) down because not enough constituents are supporting its rise.
As I mentioned, the problem with this logic is that for the most part, the Nasdaq cumulative breadth has been in perpetual free fall:
The only time this indicator was able to mount a feeble come back was in 2003. And even then, it didn’t last long. While the market continued to rise, the cumulative breadth soon fell and broke through the low set in early 2003.
To see the recent graph of Nasdaq cumulative breadth, check out the link above.
The long term chart of the NYSE cumulative breadth is even more enigmatic. From 1995 to 1998 it rose along with the S&P 500. Then it decoupled and became it’s mirror opposite until the bear market bottom in 2003. And since then it has again, walked in agreement with the market index.
To anyone who proposes the theory of “negative/positive divergence”, I would ask, when should I have bought or sold? and why?
For example, should I have sold in the spring of 1998? and missed the massive run up to 2000? should I have bought in early 2000 because cumulative breadth was turning up and breaking the downtrend? wouldn’t that have resulted in massive losses?
NYSE cumulative breadth simply doesn’t provide any sort of actionable insight. Unless I’m missing something huge. In which case, someone please forgive my elephantine ignorance and rescue me from myself.
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