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Bad Breadth Milestone A Warning For Stocks

Tyler Durden's picture




 

Bad breadth is everywhere in US equity markets...

As Bespoke Investment group wrote recently, while the percentage of stocks above their 50-days hasn’t gotten above the 80% mark all year, it also hasn’t been below the 30% mark either.  That’s a very tight range for a six-month period.  Below is a chart of this breadth reading going back to 2006, with the S&P 500′s price level included as well.  Normally you’ll see this reading swing much higher and lower, but not this year.  This is just another example of the completely sideways action that we’ve seen recently.

Going back to 1990, below is a chart showing streaks of trading days where the reading remained between 30% and 80%.  As shown, the current streak of 122 trading days is the highest seen in 15 years, but it’s certainly not without precedent.  In fact, back in 2000 we saw a streak that was double the current one, and in 1993/94, there was a streak that reached 300+ trading days.

The one concern here is that the 2000 streak came at a time when the market was trending completely sideways right near all-time highs as it is now.  When the 122 trading day mark was hit during that streak, the index was still holding on at new-highs.  As the streak got longer and longer, though, the index began to fade, and it eventually turned into a massive bear market that coincided with the Tech bust.

And as Dana Lyons notes, the weakening market breadth recently, especially as it pertains to New Highs vs. New Lows, is even more concerning.

Again, our contention is that the more stocks participating in a rally, the healthier the rally is. The most recent example of this weak breadth was Wednesday’s post on the fact that Nasdaq New Highs-New Lows have not hit a 52-week high in over 400 days. Today brings another example from the NYSE. Despite the NYSE Composite being within 2% of its 52-week high, the number of New Highs on the exchange versus New Lows actually hit a 6-month low today (*based on preliminary readings.) This is just the 8th such occurrence in the past 20 years.

image

 

 

Such breakdowns in breadth in the past 20 years with the NYSE Composite in close proximity to its 52-week high have not worked out well. As the chart indicates, this development has led to intermediate-term weakness, without fail. The prior occurrences in April 2004, May 2006, July 2007, May-June 2013 and September 2014 led to negative returns out 3 weeks and 1 month every time, with median returns of -5.0% and -4.1%, respectively.

Here are the numbers:

image

 

The good news is that after 2 months, returns gradually came back in line with historical norms. The other good news is that prior to 1996, returns after such developments were not unanimously negative. October 1995 occurrences led to essentially no drawdowns afterward. The only other occurrences since 1970 came in 1971, 1983, 1985, 1991 and 1993. While the returns were mixed in the intermediate-term, they were not as bad as those in the past 20 years.

What’s our ultimate takeaway from this development? We like to weight recent occurrences of these types of studies more heavily. Therefore, we’d consider it a negative factor for this market. That said, weakness has only been manifested over the intermediate-term. Therefore, the negative expectations, at least based on this study, probably expire after a month or two.

Generally speaking, it’s more evidence of the thinning out of this rally that has been accumulating lately.

 

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Sat, 06/27/2015 - 14:07 | 6241815 NewThor
NewThor's picture

What's the most amount of limit down clowns that can be squeezzed into one vehicle?

Sat, 06/27/2015 - 14:14 | 6241827 wee-weed up
wee-weed up's picture

I thought something stunk.

Sat, 06/27/2015 - 14:08 | 6241818 TaborKnight
TaborKnight's picture

Warning sign? We are about to go 1994 breakout mode. Pre-bubble parabolic action. 

Sat, 06/27/2015 - 14:08 | 6241819 TaborKnight
TaborKnight's picture

Warning sign? We are about to go 1994 breakout mode. Pre-bubble parabolic action. 

Sat, 06/27/2015 - 14:18 | 6241841 buzzsaw99
buzzsaw99's picture

if "the market" goes down 4.1% there will be a god damn congressional investigation.

Sat, 06/27/2015 - 17:46 | 6242392 K_BX
K_BX's picture

no worries - they will blame Sarao...

Sat, 06/27/2015 - 14:59 | 6241980 B2u
B2u's picture

I had garlic and onions and I have bad breath too....er...breadth?  oh..never mind...

Sat, 06/27/2015 - 15:14 | 6242030 Hohum
Hohum's picture

Bad breadth?  Isn't there a pill for that?

Sat, 06/27/2015 - 16:02 | 6242139 Not My Real Name
Not My Real Name's picture

Well ... bad breadth is better than no breadth at all.

Sat, 06/27/2015 - 16:03 | 6242144 negative rates
negative rates's picture

Nope, there is a town in Germany which has the cure, flossenburg.

Sat, 06/27/2015 - 16:02 | 6242141 cheka
cheka's picture

the bloodbath has already started in emerging markets.  going down down down....and the hot money is exiting at a rapid pace.  good time to start shopping for a bride or two

Sat, 06/27/2015 - 16:22 | 6242203 Consuelo
Consuelo's picture

Dunno Felix - maybe best to keep some dry powder.   Could be a glut of wenches in the U.S. when the time comes.   Hey, as long as everyone agrees and is happy, what the hell right...?

 

 

Sat, 06/27/2015 - 16:04 | 6242147 cheka
cheka's picture

http://www.wsj.com/articles/emerging-markets-face-largest-outflow-in-sev...

Emerging Markets Suffer Largest Outflow in Seven Years
Sat, 06/27/2015 - 19:58 | 6242842 fowlerja
fowlerja's picture

"Bad Breath" milestone... Where is the Listerine when you need it? ....

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