Market Breadth Indicators Mixed, Though Still Bullish
Cam Hui | Feb 24, 2014 12:24AM ET
When I was a young pup and learning technical analysis, I was told to think of the stock market as an army. To discern the direction of the market, you should watch the way the bulk of the army is moving. Maturing bull markets, it is said, typically have narrowing leadership of large cap stocks. When the major averages like the Dow may continue to advance and achieve new highs but the rest of the market fails to show similar levels of strength, it becomes a case of the generals leading but the troops refusing to follow - a warning sign for stock prices.
Breadth indicators are the way technical analysts measure the direction of the "army".
I have read a number of concerns expressed on blogs and message boards about the general breadth deterioration in US equities. I have voiced similar concerns myself about the downtrend in the number of stocks trading above the 200 day moving average (see
My last breadth indicator, the percentage of stocks in the S&P 500 trading their 200 day moving average, is telling a story of caution. As the chart below shows, this indicator has been deteriorating in a pattern of lower lows and lower highs for about a year. During the 2007-2008 episode, this indicator topped out several months ahead of the actual top. One logical way of using this indicator is to use the deterioration as a warning sign, but don't sell until the actual trend break in the S&P 500 itself, which is marked by the vertical red line.
We had a minor trend break in the S&P 500 when the market dipped below its 50 day moving average in its most recent decline. However, it was only a brief and minor violation of the uptrend. While it does serve as a warning sign, I cannot call the event a definitive sell signal for the market in light of the strength of the other breadth indicators.
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