Bottom-Up Breadth 'Bearish-est' In 19 Years

Tyler Durden's picture

We recently noted that the average Russell 2000 stock is down over 22% and the majority of the broad equity market is well into correction territory as the rally is supported by fewer and fewer names (cough AAPL cough). However, as FBN's JC O'Hara notes, looking at the percent of stocks above their 200 day moving average in the S&P 500 vs the percent of stocks above their 200 day moving average for the Russell 2000, we find the spread is at its widest point in the history of our database. While we find breadth is not a proper market timing tool, a heightened reading often forewarned of troubles ahead. It was more common to alleviate a wide spread by the S&P pulling back to the Russell rather than the Russell playing catch up.

 

Via FBN's JC O'Hara,

We have been discussing the erosion of breadth specifically from the view point of where the average stock is in relation to its 52 week high. Currently, the average S&P 500 stock is -5.5% below its 52 week high compared to the average Russell 2000 stock which is -20% below its 52 week high, a very large discrepancy between the two indices. The S&P 500 is at a new all times high while the average Russell 2000 stock is in a stealth bear market. Another way to measure breadth is to look at the percent of stocks above a certain moving average. This measure does a good job of compiling the bottoms up breadth of an index.

Typically, the S&P and Russell track each other closely when it comes to this measure of breadth. Taking the study one step further we measure the spread of breadth between the two indices. Looking at the percent of stocks above their 200 day moving average in the S&P 500 vs the percent of stocks above their 200 day moving average for the Russell 2000, we find the spread is at its widest point in the history of our database.

Examining the last 19 years of data we find this spread on average is ~ 7.5. The current spread is nearly 4 times as wide, registering 29.7 at yesterdays close, coming off its highest reading of 38.9 on May 14th. The chart on the previous page attempts to illustrate how the S&P 500 reacted to extreme spreads between these two breadth indicators. While we find breadth is not a proper market timing tool, a heightened reading often forewarned of troubles ahead. It was more common to alleviate a wide spread by the S&P pulling back to the Russell rather than the Russell playing catch up.

Below we list the highest points of this spread above 20 and comment on the forward reaction of the market. While it is in the Russell’s power to catch up to the S&P 500, history suggests that is not the likely outcome. Whatever path these two indices decide to take over the next few months, investors should appreciate just how different the stocks in each group are behaving. Something is abnormal and uncharacteristic of conventional markets.

Breadth readings confirm that the S&P 500 and the Russell 2000 are two very different markets now.