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Market Breadth: Down, But Not Out at Trader’s Narrative

Since the market is making fresh new lows, lets see if the market breadth is showing any signs of a potential exhaustion point.

Here is a chart of the daily Nasdaq advance decline numbers, averaged out with a simple 11 day moving average:

nasdaq adv dec long term chart mar 2009

The last time I mentioned the Nasdaq advance decline chart was late last year when it was extremely overbought and the S&P 500 trading at around the 900 level.

Here’s another way of looking at pretty much the same data, the Nasdaq McClellan Summation Index:

nasdaq summation index mar 2009

At first glance, it looks like its just a cleaner version of the first. For the purpose of this exercise, it confirms that while the market breadth got washed out completely late last year, what we are seeing now is not at all similar to previous times.

Compared to the current one, the 1998 global financial contagion looks like a sneeze. But when the market made a double bottom in September and October 1998, both it and the breadth measures lifted off to higher ground. By the time the first dip to -750 (on the Summation Index) happened, the S&P 500 Index was not only off its lows, it was higher than its previous swing high.

Instead, if you look carefully at the current McClellan Summation Index, you’ll notice that since mid-October 2007, this measure of internal market health hasn’t even been able to break the zero line. And going back to 2003, almost each and every subsequent high was lower than the previous one.

This is what makes this current market so damn frustrating to navigate. My hunch is that we are once again nearing a bounce. Whether it sticks as a long term support or not, I have no idea. But I base that expectation on two reasons, the technical data, like the market internal data outlined above as well as the inflation adjusted returns and on sentiment. We are finally seeing some definite signs of exhaustion in sentiment, which I’ll go over in more detail in tomorrow’s sentiment overview.

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