Wednesday, February 11, 2015

Several Views of Stock Market Breadth

Recent market behavior in stocks has been confusing for traders, as we've had a good deal of volatility during 2015, with little ultimate directional movement.  VIX has stubbornly stayed above 15 for much of this time, a notable change from most of 2014.  Here are three views of breadth in the U.S. stock market that can help us make sense of what has been going on.

The top chart represents all stocks listed on major exchanges and the number making fresh three-month new highs vs. three-month new lows.  (Raw data from the Barchart site).  You can see that breadth has been waning since the late October and late December market peaks.  Breadth has tended to peak ahead of price during intermediate term market cycles.  What I believe has helped make recent market action confusing is that the current cycle has been very choppy, but the breadth measure peaked in late December and we're in the process of topping.  An implication of this view is that the downside to the current cycle should ultimately break us below the 2015 lows to date.

The middle chart represents only stocks from the SPX average and tracks the number making 5, 20, and 100-day highs minus lows each day.  (Raw data from the Index Indicators site).  This, too, tends to top ahead of price during intermediate-term cycles and hit its recent peak in late December.  Notice how new lows did not expand for either the top or middle measures when we made recent early February lows.  That set up the current upswing.

The bottom chart represents the cumulative number of NYSE stocks closing above their upper Bollinger Bands vs. those closing below their lower bands.  It is a running total, like an advance-decline line.  (Raw data from the Stock Charts site).  That measure has been on the upswing and is consistent with the lack of fresh weakness at the recent market lows.  It is one of several factors that has kept me from prematurely shorting the current market.  Note, however, how we are well below 2014 highs in this measure.

Bottom line is that we are seeing positive breadth, but weakening breadth over time.  I continue to view this as part of a larger topping process in stocks.

Further Reading:  Perspectives on Breadth