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Market Breadth Leaves Bulls Wheezing at Trader’s Narrative

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:

nasdaq adv dec 20 day MA Mar 2010

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 other breadth metric which somewhat mimics the advance decline for obvious reasons is the Summation Index:

Nasdaq summation index Mar 2010

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:

Nasdaq new high low ratio chart Mar 2010

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.

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3 Responses to “Market Breadth Leaves Bulls Wheezing”  

  1. 1 john

    Yeah, but….

    The EMA(20) of $NAUD has higher highs and higher lows since October. Just like the EMA(20) of $NYAD.

    As for pre-October, shouldn’t you expect the pre-October figures to be better than the post-October figures? The market really had nowhere to go but up for most of last year, whilst now it has a choice.

  2. 2 monkeyman

    adv-dec is making a new high. this would argue breadth is better than the headline indices.


    So Good That Market Breath Will Bite You

    Again, the best way to look at the breath of the market, is to compare the 10 day
    breath with the 30 day breath. For example, the 30 day breath is a positive
    16058. The ten day breath is barely over positive 1300. The problem that this market
    has is that the 30 breath has almost no declining days. For example, the 30 day breath has to contend with 5 positive breath days in a row. Then it takes off 2 negative days of -12 and a -1188. Then the 30 day breath has to contend with
    the next 12 out of 13 days being positive. The one negative is only a -6.
    Keep in mind that the 10 day trin is at .92. This indicator does not get overbought
    until it drops below .80. However, since it is getting reasonalby low enough to conclude that this market is getting into more trouble.

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