It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

New Highs For The Year But Market Breadth Stinks at Trader’s Narrative

With today’s close the S&P 500 index arrived at a new high for the year. So far, it has risen 22.8% - not bad at all compared to the average historical return. And the year isn’t even over yet. If we look at the performance from the very bottom of the lows in March, it is even more remarkable at 63%.

But even as the stock market continues to power ahead, and longevity of this rally continues to strain all credulity, we can’t ignore that the market breadth is down right horrible. Usually, the measure of advancing vs. declining stocks rises and falls like a tide, keeping a rhythm with the indexes.

Right now however, the 20 day average of Nasdaq’s daily advancing and declining issues is acting the way it would at intermediate lows - even though we’ve well into an uptrend:

nasdaq adv dec 20 day MA Nov 2009
S&P500 index compared to breadth Nov 2009

This means that fewer and fewer stocks are pushing the averages higher. When we start to see less participation from the wider spectrum of stocks trading on the exchange, we don’t have a healthy rally. My hunch is that most of gains can be laid at the feet of the large caps either because of their international sales exposure or because of the dollar carry trade (sell the dollar and buy anything risky). Check out the Russell 2000 - it has yet to confirm a new year to date high as the S&P 500 index. The same can be said for the equal weight S&P 500 index.

Another cause for concern is just how quickly the index has been able to rise on the back of fewer and fewer rallying stocks. For a bull market to be considered healthy, it has to have staying power. This is an endurance run after all, not a sprint. I measure the speed of a rally by comparing the closing daily price to the long term trend as measured by the 200 day moving average.

While the 200 day moving average has been rising, it hasn’t been able to climb as fast or faster than the price it tracks. So the distance between them as a ratio has increased. With today’s strong close, the S&p 500 index is now 19.3% higher than its long term trend line. That’s slightly more than the last time this same metric made me raise the caution flag: Stocks Have Little Room to the Upside.

That was 11 points lower than we are now. Running the numbers with a 20% and 21% ceiling, we get 1117 points and 1127 points respectively. So imagining that we leapfrog 8 to 18 points from here, we will have hit an invisible wall. Check out the previous link above to see a chart.

So odds are that we either correct here (again) to give the long term moving average a bit of time to catch up. Or prices meander to and fro, not really going anywhere and boring both bears and bulls. There is very little probability, from a historical study of the market, that we will see a rush higher.

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

6 Responses to “New Highs For The Year But Market Breadth Stinks”  

  1. 1 felix bartram

    thank you for the information, but i sense that you are short, and getting blasted on the way up.
    respectful, i disagree with your call regarding the advances vs declines, as evident today’s rally;even the financials were participants.

  2. 2 Babak

    felix, while everyone can’t help but ‘talk their book’ - why else would they hold a position if they didn’t believe in it? - I’m not short. Just not long (anymore).


    Babak - like u, I prefer looking at Nasdaq breadth rather than NYSE, as it is cleaner.

    However I can’t help being impressed by the NYSE A/D Line being at the August 07 Highs again.
    And the NYSE A/D Line correctly “called” the Oct 07 top by diverging / peaking a few months before then in August.
    Wheras Nasdaq A/D Line peaked a few years before that I beleive.

    Would apreciate your thoughts on this, as I really value your opinion.

  4. 4 Babak

    Paul, I don’t use cumulative breadth on either the NYSE or Nasdaq. Are you referring to the cumulative or the daily average, as I’ve shown above?


    Glad I asked the question Babak - your link explains everything really well thanks.

    Was cumulative btw

  6. 6 Babak

    Paul, yes cumulative has got some problems as you saw in the detailed post from the link above. That’s why I average the daily readings instead.

Leave a Reply