Friday, October 17, 2014

What Market Breadth Has Been Telling Us Lately

Here are two updated views of stock market breadth.  Recall that it was waning breadth that gave us a heads up on the recent market weakness.  What we're now seeing is the reverse.

The top chart monitors all common stocks traded on the major exchanges making three-month new highs vs. three-month new lows.  We can see from the chart that this decline has been much broader than ones previous.  New lows hit their maximum level so far on October 10th and then held slightly above that level at the market low on October 15th.  With yesterday's buying interest--my Buying Power measure hit its highest level since 2012 yesterday--new lows dried up and so far in premarket today we're seeing continued buying interest.  This suggests a momentum low has been put in place.

The second chart tracks the number of NYSE issues closing above vs. below their upper/lower Bollinger Bands, which I refer to as the Bollinger Balance.  Note again the recent persistent weakness, the failure to expand the number of shares closing below their bands at the recent lows, and now the drying up of that weakness.

As I've stressed in the past, it helps to think of topping and bottoming as processes, not as fixed points on a chart.  Markets make bottoms when they hit a momentum low, bounce, and then subsequent weakness occurs with less downside momentum and volatility and fewer shares making new lows.  It would surprise me if this bottoming process is over--a general rule is that more extensive declines undergo more protracted bottoming--but a continued drying up of weak breadth is something I'll be on the lookout for to find opportunities to scoop up some value.

Further Reading:  Finding Opportunity in Stock Market Cycles