Tuesday, December 30, 2014

Tracking Breadth Across Market Cycles

Above are two perspectives on stock market breadth, focusing on the stocks within SPX.  The top chart tracks the percentages of SPX shares trading above their 3, 5, 10, and 20-day moving averages.  The bottom chart is a moving average of the number of SPX stocks making 5, 20, and 100-day new highs minus new lows.  (All data from the excellent Index Indicators site).

Note the distinct tendency of the breadth measures to top ahead of price during market cycles.  The quicker breadth measures also tend to bottom ahead of price, which gives a bit of heads up on those potential V bottoms.  What we're seeing from these measures presently is a healthy degree of upside breadth.  We are not yet seeing the kind of decline in breadth that has preceded recent market drops.  Historically, a buy dips mode has worked well in such an upside breadth environment.

For example, going back to late 2006, when over 75% of SPX stocks have traded above their 100-day moving averages and fewer than 50% of those shares have closed above their 3-day moving averages, the next three days have averaged a gain of +.22%, versus an average gain of only +.03% for the remainder of the sample.  Knowing where we stand with respect to breadth during a market cycle can provide a useful road map for short-term trading.

Further Reading:  Breadth Volatility