Long Term Cumulative Breadth Charts
Published May 14th, 2008 in Market Internals Tags: bear market, breadth, cumulative breadth, market bottom, market breadth, market index, market internals, Nasdaq, negative divergence, NYSE.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?
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.
bear market, breadth, cumulative breadth, market bottom, market breadth, market index, market internals, Nasdaq, negative divergence, NYSE
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6 Responses to “Long Term Cumulative Breadth Charts”
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You got it exactly right Babak. The same can be said about total volume on NYSE. People are saying how this rally is built on weak foundations because of low volume. Well, that’s non sense, because a look at the charts show no reliable buy/sell signals from volume!
Henry
Hi Babak,
You are still doing incredible work here, keep it up! I had a question about how you’d allocate your capital with the breadth situation the way it is now. I’m talking about % of S&P above 50-day MA looking high but % of S&P above 200-day MA looking good still. If I look back to 2003 I see that coming off a big bear market the % of S&P above 50-day MA managed to stay overbought for a very long time. Currently we are coming off only a 20% decline, so I would not expect the indicator to stay overbought for the same amount of time. Personally, I am not using this indicator as an opportunity to short just because it looks a little overbought. Do you use these opportunities to trim your long exposure or do you try to time small corrections in what looks like a new uptrend by going short?
I speak for the breath of Nasdaq. I think it is the way it is, going down and nothing else
because a carnage has happened the last few or more years in the small caps world.
The recovery of 2003 for a few months had to do exactly with the rally these small caps
experienced at this time. Nasdaq contains some thousands of stocks mostly small caps
and some few big caps that make the Nasdaq indexes. So the breath actually contains some usefull information and this to my opinion is when the small caps do well and when not.reagards
Using any single indicator is always asking for trouble, especially if you are using the same ones as everyone else and using them the same way. That said the cumulative breadth line looks a little different if you compile it for common stock only (no etf’s etc) and adjust for changes in the number of issues.
How you measure divergence also makes a difference. Eyeballs tend to spot 9 out of every 2 divergences or vice versa depending on the biases of the viewer.
Personally rather than look at the number of issues above a certain average I look at the average % they are above it. If 80% of stocks are above a 50d MA but on average they are only 1% above it that’s a very different situation than if they are 5% above it.
I also like % that are overbought or oversold based on 1 SD bollinger bands, which more or less combines those 2 measures.