It's been quite a rally off the October lows for U.S. stocks. My most recent update showed continued buying interest in stocks, based upon the upticking vs. downticking of shares across the broad market. Above is an update focused on market breadth.
The top chart is my intermediate-term measure of breadth, which is a 10-day moving average of the number of stocks in the SPX that are making fresh 5, 20, and 100-day highs vs. lows. This measure tends to peak ahead of price during intermediate-term market cycles. What we've been seeing lately is that intermediate-term breadth has been quite strong during this rally and is now starting to roll over. That doesn't mean that we are about to have a major correction, but it is the first indication we've seen in a while that the rally is maturing.
The middle chart is a composite measure of SPX stocks trading above their 3, 5, 10, and 20-day moving averages. (Both the top and middle charts come from data provided by the Index Indicators site.) Notice that this breadth measure also tends to peak ahead of price during market cycles and we're seeing a cresting in it as well. Again, this doesn't mean we're seeing outright weakness in stocks; just that strength has been waning.
One way we can observe the waning strength is by counting the number of common stocks across all indexes that have been making fresh three-month highs vs. lows. That number stood at 1024 highs and 168 lows on October 31st. Yesterday, we saw new highs in the major averages but only 502 highs versus 139 lows. I don't get concerned about a bull market until we begin to see an outright expansion of short-term new lows. The breadth data are suggesting a loss of strength in the rally; not the beginning of weakness.
The reason for this can be observed in the daily balance of upticking vs. downticking among all NYSE shares. That balance has also been declining in recent days after an extremely strong move off the October lows. The net balance, however, has remained firmly bullish. We are seeing fewer buyers in this market, but are not as yet seeing an influx of sellers.
In practical terms, that can set us up for rangebound, corrective action in the near term, but if precedent holds, we should see price highs ahead even if the recent levels end up representing momentum peaks. It's not enough to see reduced buying strength to get a fresh bear leg; we have to see an affirmative expansion of selling pressure.
Further Reading: Finding Opportunity in Stock Market Cycles