Bad Breadth Milestone A Warning For Stocks

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.

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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:

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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.