Bad Breadth Bounce: Lack Of "Buying Thrust" Suggests Retest Of The Lows

After yesterday's late-day 500-point collapse in The Dow, many are wondering it "it" is really over or not?

And today's bounce is not holding...

And there are signs that the bounce of the last week or so is that of a dead-cat, rather than a resurrected phoenix.

As BMO Nesbitt Burns' Russ Visch explains:

In technical analysis parlance, a "breadth thrust" is a day in which the market's "internals" (advances:declines, up volume:down volume, total volume) are so heavily-skewed towards the buyers it looks like market participants are stampeding back into stocks.

They tend to occur shortly after a major sell-off and are a highly reliable signal that a sustainable new uptrend has taken hold. i.e. — an "everybody back in sustainable new uptrend has taken hold. i.e. — an "everybody back in the pool!" moment that reflects a bullish sea change in investor sentiment.

However, as Visch points out, despite the amazing rebound in equities over the last week or so, none of the days qualify as a true breadth thrust.

In fact, it's not even close.

That could change any day of course but if it doesn't, be open to the possibility that we come back to re-test last week's lows to some degree in the next week or two.

Visch warns that the worst case would be a dip back to 15,000 for the S&P/TSX Composite and 2575 or so for the S&P 500...

He's not alone in watching the breadth signal for all-clear signs.

Bloomberg notes that Stephen Suttmeier of Bank of America Corp. said the market experienced three days this month where 90 percent of total stocks and exchange volume were down, and he’s now waiting for its opposite. It would “help confirm a meaningful low,” he said.

And Chris Verrone at Strategas Research Partners said “panicked buying” has occurred after almost all major meltdowns during this bull market. Breadth readings spiked above 90 percent twice amid the summer swoon in 2015, and showed similar pattern after the selloff in early 2016.

“We would still contend that putting in a good low is a process and the likelihood of some additional drama in front of us is high,” Verrone wrote in a research note.

Additionally, Bloomberg reports that Ned Davis, of his namesake research firm, draws the parallel between today and 1987, and warns investors to watch out for a repeat of that October, when an initial bounce failed to take hold and then snowballed into a bear market.

“It was that rally that was the big clue an ‘accident’ could happen, and that is what I would watch in the days ahead,” Davis wrote in a note earlier this month.