A Different Look At The Market's Weak Breadth

Above, with big kudos to the excellent Index Indicators site, we can see a chart of the SPX (black line) over the past six months.  Overlaid in the green line is the percentage of SPX stocks trading above their 20-day moving averages.  Note how this percentage has tailed off in recent days, falling slightly below 50%.  It is one further indication of weak breadth in the current stock market.  (Please check out the recent Forbes article for a detailed discussion of current market breadth and what that has meant for stocks over the past 20 years).  Indeed, I went back to my database which starts in 2006 and examined all market occasions in which SPX was up over 5% in a month, but the majority of its stocks were trading below their 20-day moving averages.  Surprisingly, there was only one occasion, on July 25, 2011.  That preceded a double-digit percentage decline in stocks over the next 10, 20, and 50 days.

When I divided the sample of strong monthly returns in quartiles based upon the percentage of SPX stocks trading above their 20-day moving averages, I found that the quartile with the weakest breadth returned an average of -.77% over the next 50 trading sessions.  All other occasions averaged a 50-day return of +3.05%. The results suggest that, when we have strong upside momentum, the rising tide lifts all boats and forward returns are favorable.  When the tide is not lifting all boats, there is reason for caution.

The current market is interesting because there are differences among stock sectors regarding relative strength, with technology (XLK), consumer discretionary (XLY), and communication services (XLC) sectors quite strong in the relative performance ratings of StockCharts and the energy (XLE), financial (XLF), utilities (XLU), and real estate (XLRE) sectors notably weak.  Even within each of these sectors, there are relatively strong and weak industries.  For example, in the weak energy sector, renewable energy equipment shares are very strong.  In the strong technology sector, telecommunications equipment companies are weak.

As we move forward, shifts in the market's advance-decline numbers will tell us a great deal as to whether the rally can broaden out and sustain itself or if it falls into a topping mode with continued industry and sector weakness.  I note that, even with the recent market strength, we're seeing subpar performance from banking stocks, real estate REITs, integrated oil and gas shares, airlines, and marine transportation companies.  If the economy is to turn around, these areas should display growing strength.  For that reason, they are among the parts of the market on my radar.

Further Reading: Runaway Bull Market and Weak Breadth

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