In the last post taking a look at market breadth, in mid-February, I pointed to waning breadth but continued buying interest to suggest that we had made a momentum peak in stocks, that further price strength was likely, and that the recent rally was part of a longer-term topping process. The most recent market weakness, in response to economic strength and concerns regarding an eventual normalization of U.S. interest rates, is consistent with the February view.
As we can see from the top chart, which tracks the number of stocks across all exchanges registering fresh three-month new highs vs. lows (raw data from Barchart), breadth has been waning in the stock market since the very late October highs. Despite new price highs during 2015, the number of stocks participating in that strength has been unimpressive.
On a more micro basis, the middle chart tracks all stocks listed on the NYSE and whether they are giving buy signals or sell signals on the CCI (Commodity Channel Index) indicator (raw data from Stock Charts). As a rule, this measure has topped out ahead of price during intermediate term market cycles and bottomed shortly ahead of price at market troughs. We indeed see the weakening pattern preceding the recent drop. Interestingly, we are currently near levels that have corresponded to intermediate term market bottoms.
Finally, on the bottom chart, we have the percentage of stocks in the SPX universe that have closed each day above their 3, 5, 10, and 20-day moving averages (raw data from Index Indicators). This, too, has tended to top ahead of market peaks and bottom slightly ahead of or coincidentally with market troughs during intermediate term cycles. Here too we notice the pattern of weakening prior to Friday's drop. We also see that the breadth measure is close to levels seen near recent market troughs.
So what does this all mean? I continue to believe that stocks are in a longer-term topping process; that the topping is probably related to the ending of aggressive monetary stimulus; that continued buying interest and price strength suggest that the topping process has not ended; and that we close to short-term oversold levels that have corresponded to market bounces over the past year. Such an environment can provide good trading opportunities, though it may provide limited upside for investors.
Further Reading: When V Bottoms Are Not V Bottoms