Tracking Breadth Spreads In The Stock Market

In the recent post, I mentioned how traders who are successful in the current environment have been flexible in their approach to trading and focused on opportunity, not just risk.  Those traders are highly involved in markets, but still taking the time to review their trading, identify what is working and what is not, and research areas of fresh opportunity.  In the volatile environment, they are not just coping; they are innovating.

Above is something fresh I've been looking at, which I call breadth spreads.  The chart represents the topping of the SPX from the beginning of December, 2019 through the February top.  The red line represents the percentage of stocks above their 100-day moving average in the Standard and Poor's 600 Index of small cap companies minus the percentage of stocks above their 100-day moving average in the Standard and Poor's 500 Index of large caps.  (Data from Index Indicators).   Notice the steadily weakening breadth spread as the large cap index made its all-time highs.  Well before the market tanked, small caps relative to large caps were selling off.

This is something I'll be researching going forward.  Do breadth spreads of shorter-term moving averages precede shorter-term moves in the market?  Do breadth spreads of other indexes precede important market turning points?  This strikes me as a promising line of inquiry; I'll update findings on the blog.

Meanwhile, FWIW, we're seeing short-term negative breadth spreads show up between small and large cap indexes in the most recent market action.  Let's see how that plays out--

Note:  4/5/20 - I went back to January, 2015 (start of my dataset) and divided the breadth spread into quartiles.  When the spread was highest between the percentage of SP600 and SP500 stocks above their moving averages on a five-day basis (highest quartile), the next five days in SP600 averaged a gain of +.34% and the next five days in SP500 averaged a gain of +.40%.  When the spread was lowest on the five-day basis (lowest quartile), the next five days in SP600 and SP500 respectively were -.065% and -.037%.

Further Reading:

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