Wednesday, September 24, 2014

Multiperiod Breadth: Capturing Short-Term Market Strength and Weakness

Above is a way of looking at breadth in the SP500 Index that I have found useful in tracking short-term market cycles.  Breadth bottoms at or near cycle price lows and tends to top ahead of cycle price peaks, providing a nice heads-up on weakness.  The recent waning of breadth was an important factor in anticipating the latest market weakness.

The indicator is a multiperiod breadth measure.  It consists of the number of stocks in the SP500 Index that are making fresh five-day highs minus five-day lows added to the number making fresh 20-day highs minus 20-day lows and the number making new 100-day highs minus 100-day lows.  (Data via the excellent Index Indicators site).

Going back to 2012, when the multiperiod breadth has been strong (in its top quartile of daily readings), the next five days in SPX have averaged a gain of only +.05%.  When multiperiod breadth has been weak (in its bottom quartile of readings), the next five days in SPX have averaged a healthy gain of +.78%.  With the recent selloff, the breadth measure is now in that bottom, weakest quartile, consistent with oversold levels that have averaged rallies over the subsequent week.

Further Reading:  The Structure of Market Cycles