Above we see a chart of SPY from the start of 2014 to the present. In red, we see the number of stocks across all exchanges that registered fresh one-month lows each day. (Raw data from the Barchart site.) Notice that we're only looking at new lows--a measure of weakness. We are not combining the new highs and lows, which can muddle the views of strength vs. weakness.
What we see are sharp elevations of new lows around important cyclical bottoms. What we also see is that new lows begin creeping higher before markets top out during these cycles. This was dramatically the case during the second half of 2014 but also occurred leading up to the March top of this year. While new highs have been waning per the recent posts, notice that we are seeing *very* few new lows most recently. The market has not been getting stronger in terms of breadth, but neither has it been weakening.
On Friday, we saw 168 shares post new monthly lows across all exchanges. That is well below the median value of 350. When we have had fewer than 200 stocks post new monthly lows since the start of 2014 (N=58), the next five days in SPY have averaged a gain of +.34% vs. an average gain of +.13 for the remainder of the sample. While a market without weakness might appear "overbought", in fact it is healthy in the short run. In order for the broad stock market to roll over, we have to see some leading stocks and sectors display weakness. At the moment, we are indeed "overbought", but not weak.
Further Reading: Breadth and Market Cycles
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