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Stocks Hit Bullish Breadth Extreme Not Seen Since April




Today an important gauge of market breadth reached an extreme that it hadn't seen since April 2010 - just before the stock market in general topped out. The bulls have been attempting to recover since then, putting in unexpectedly strong September.

The metric I'm referring to is the percentage of stocks in the S&P 500 index which are trading above their own 50 day moving averages. I wrote about this way back in late March when I first started to caution you about an impending top (When the Stock Market Goes Streaking):

Based on this and other indicators (like the options trading activity and the amount of froth from speculative trading), I do think we are at or very close to a top here. The market may move ahead a bit more but like other times, it will quickly give that all back and more.

That was exactly what happened. The S&P 500 index went on to tack another 40 points before peaking just below 1220. Technically, when I wrote the cautionary note in late March, the percentage of S&P 500 components above their 50 day moving average was still below 90%. This seems to be the threshold at which stocks hit a wall - with one exception, which I'll explain a bit later.

With today's strong showing, the bulls pushed the breadth measure to 91%, the highest it has been since April 16th. So while the gains may seem impressive, just as they were in late March, I'm growing wary of what is coming around the corner.

Click for a larger version of chart in a new tab:
percent S&P500 above 50 MA Oct 2010

There are two important caveat I should mention. First, NDR actually considers this development to be very positive for the market. They were in fact saying this in mid-April: A Very Rare Breadth Buy Signal From NDR. I'm leery of disagreeing with any research firm of this caliber but I think I spot why we disagree.

This brings me to the second caveat and the exception I mentioned before. While this breadth measure is a reliable indicator of market tops, it does fail spectacularly at times. As all oscillators, there are instances where it gives us a reading of extreme overbought and the market continues to power higher in spite of it.

These are time periods of very powerful thrusts which propel stocks higher than anyone suspects and feed off a feedback loop that is self-reinforcing. But they tend to be rare as the conditions necessary to induce them only occur every once in a while. We last saw this in April 2009 (not shown on chart) just as the market was lifting off a very oversold condition.

This is an important distinction to make. That is to say, is the current market displaying characteristics of a powerful thrust? or are we in a 'normal' market? If the first, then overbought signals, like this one, are meaningless. If the latter, then we are indeed due for a pullback, returning us back into the summer range.

From a technical perspective, I'm not seeing too many signs right now that we are in a momentum market. The other clue is that while in April the percentage of S&P 500 component stocks above their 150 moving average were also extremely high (+90%), right now they are still moderate (70%). Usually, a momentum market is marked by this longer term breadth being sustained above 70% for a length of time - as it was from July 2009 to January 2010.

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11 Responses to “Stocks Hit Bullish Breadth Extreme Not Seen Since April”  

  1. 1 Russ Abbott

    Another possibility is that the market may be much more highly correlated now than usual.

  2. 2 Denali92

    The BIG question concerns whether this time is different? The analog that we seem to be closely resembling, particularly in the midcaps is 2006 - pre election year, spring top, summer bottom, etc... Yes, times are different, but the similarites are there.

    What happened to this breadth measure during the relentless rise in Fall 2006?

    THANKS as always for your excellent perspective.

    -D

  3. 3 PEJ

    Thanks Babak for providing some clarity in these difficult times for bears :-)

  4. 4 Avi

    nice post babak

    here is my take.. we have some negative divergence (BKX, europe, SOX) but right now the trend looks like we might get up to the old high on QE part II ... kinda like summer of 2008, as hot money is flowing into emerging markets (asia)

    Unitl S&P breaks below 1120 I have to be bullish with a target of 1200 -1250

  5. 5 RACKEL

    @ Denali92

    The breadth never rose above 90% during the 2006 fall rise. It peaked at about 85% in mid-october, and then started to drift down to 66% at the end of the year even as the market continued higher.

  6. 6 Hilarin Felder

    Sorry for being so dense, but I do not understand your last paragraph. After saying the % of the S&P over the 50 average is 90% , you seem to say that it is still in the 70s, while the chart shows that it has gone over 90% once again. If we do have a correction, what will precipitate it? Jobs numbers this week? The election? Ireland? Or does it matter? What goes up must eventually come back down (at least part of the way).

  7. 7 Ernest

    Hilarin Felder, the 91% is above the 50 day MA, while the 70% is above the 150 day MA.

  8. 8 Denali92

    @RACKEL

    Thanks for the info on 2006 - I am watching the 2006 analog closely, as it may be the path that causes the most pain to the most people, save for the Fed and the politicians.

  9. 9 Karburator

    Thanks Babak

    I always learn from you a lot of useful things. This is one of the best sites on the internet about the stock market.

    Thanks again.

  10. 10 Alex

    For testing purposes, I have this data back to 1996, so we only have 14 years of history, but at least it covers several different types of market regimes. There have been 7 distinct times that the percentage of stocks above their 50-day moving average rose to the current level. The S&P performed positive after 1 e 3 months in 6 of that 7 issues.

  11. 11 Babak

    Alex, that's interesting. Would you please fwd the study so I can look it over? thanks

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