It is difficult not to notice the weak breadth and volume that has accompanied this recent bounce in equities. The recent column by Michael Kahn over at Barron’s lays out the case as you would expect (The Low-Volume Stock Rally). Here I’d like to look under the chart, so to speak, and see what is really going on with breadth right now.
We already covered this concern tangentially in the most recent update from Lowry Research. Basically, Lowry believes that the total volume at the bottom of your chart is misleading. Instead they look at the ratio of up volume and down volume as well as their own proprietary metric of supply and demand which includes this (and other variables) into account.
My concern is not with the the breadth data such as the advance decline line for the Nasdaq. As you can see from this recent chart, the rally has been supported by quite a healthy and broad advance in stocks across the board:
I’d be especially satisfied if that line would break the downtrend it has established since April 2009 with lower lows and lower highs. But as you can imagine major tops are a process not an event and the worst case scenario is that we are seeing the first steps in that process.
The downward trajectory of this chart is a bit disconcerting. But the number of new highs, a key indicator for the health of the cyclical bull market, is once again going strong:
A break higher to the January highs at 1150 on the S&P 500 index and then on to the next natural resistance - 1200 which started the cascading 2008 bear market declines - would be natural. But in the short term, I really think that is too tall an order for this brave little bull. The Consumer Confidence study suggests that the next 3-6 months will belong to the bulls. But let’s not be too hasty.
In two weeks we will mark the 6 month anniversary of the very rare and extreme situation we witnessed in the S&P 500 on September 16th 2009 when it traded +20% above its long term trend. For the details: What Happens This Far Above the 200 Day Moving Average? On that (in)auspicious day the S&P 500 closed at 1068.76. While price tends to push and pull from trend like an elastic band, it is very rare to see the S&P 500 trading so far away from it.
In fact, before this instance, the last time we had seen things price move so out of whack with the 200 day moving average was way back in July 31st, 1997. Usually what follows is a few months of substandard returns, as was the case in 1997. This time around though the momentum thrust pushed prices higher until January - with a few bumps along the way of course.
As of today’s close, the S&P 500 is 8% above its long term trend. Its recent low was on February 8th 2010 at 3.77%. When we get to that 6 month anniversary, I’ll update the historical statistics as well as the chart and write a bit more about this. Oh and don’t forget to join me March 11th, next Thursday, at the Daily Sentiment Index webinar hosted by Jake Bernstein - the first and only webinar of its kind to not only teach you about this indicator from its creator but also go into specifics of how to properly use it as a trading tool.
Enjoyed this? Don't miss the next one, grab the feed or