Market Breadth

I mentioned I wanted to get a breadth post out, so here it is.

Market Breadth is a great way to look under the hood of the market to reveal whether things are as they should be, sometimes better than they should be (calls bottoms) or worse than they should be (calls tops) and we can see how things are now vs several years ago (gives us an idea of how strong the next break can be).

There's no interpretation here, these are hard numbers, these are statistics so there's not much to interpret it is what it is and that's what I like about breadth indicators.

Take a look at a few of my favorites.

The indicator is ALWAYS green, the comparison symbol is the S&P-500 in red except when otherwise specified.

 First, this is an indicator that shows the percentage of stocks trading 1 standard deviation above their 200 day moving average, as you can see the red SPX is around the April highs, the indicator should be at the same area, it isn't as fewer stocks are able to maintain momentum.


 This is the same exact indicator, but showing the entire period from the 2009 lows, in 2009 the percentage of stocks 1 standard deviation above the 200 ma was over 80%, now it's virtually half that and has declined at each year's high, the bottom line, the entire 2009 to present, move is internally falling apart at the seams.

 This is the percentage of stocks trading 1 standard deviation above their 40 day moving average, the percentage of stocks should rise with the SPX, instead they have declined progressively since mid-June.

 This shows the % of stocks 2 standard deviations above their 200-day moving average, for a long term rally, you want to see this keep up with price, when it is not, the rally is decaying from inside out, from 55% of stocks in 2009 to 35% in 2011 to less than 14% now. This should give you some idea of how bad a break from here could be and how manipulated the averages are to move them higher, even though there are fewer healthy stocks, fewer than EVER here.

 % of stocks 2 standard deviations above their 40 day moving average, we really want to pay attention since the June lows where we saw the reversal coming on a bear trap. Look at the breadth at the end of June, over 35%, this indicator hasn't been able to keep pace at all in the near term, I'm especially interested in the recent breakout area, the indicator completely failed to move with the SPX.

 This is the Absolute Breadth Indicator, watch for divergences, the 2012 divergence and since July, this has been all down hill. This indicator makes the June move to now look like what what be known as a counter trend rally, it's still a part of a bear market, in fact the Crash of 1929 had 6 bear market rallies, some VERY strong, they have to be as they are there for a reason, to convince longs it's safe to enter the market again which is the same thing smart money needs to sell/short in to, same concept as we talk about with head fakes, etc.

 Cumulative Volume, Any healthy rally should see increasing volume with price, the 2002-2006 rally in the market saw increasing volume, here we see a major divergence that really worsened in July.

 Take a look at the history of the same indicator, it was perfectly in line with the SPX until the 2012 top, again, this makes the June move look very much like a counter trend rally, which is just a break in the downtrend before resuming to a new, deeper low. The value of these indicators is confirmation of trends such as we see in the green box to the left or divergences as we see now (negative).

 The McClellan Oscillator is used many ways, I like it best as a divergence indicator, it makes excellent calls, just as we saw a bear trap at the June lows for an upside reversal, the MCO also called a positive divergence at the June 4 lows, it stayed in lined through June before going negatively divergence, August has seen the worst readings, the MCO is trapped and can't follow price higher at all, it's stuck at the mid July area, below the June highs, it's also not far from zero. Many traders consider MCO under zero an absolute bear market.

 The Zweig Breadth Thrust is used many ways as well, but as you can see, using it as a divergence indicator is very useful, here we see it call a positive divergence at the June lows where we added our long hedges, since, just like the MCO, it has declined badly from the June highs, it should be with or higher than price.

 These are Advance/Decline Indicators, there's no interpretation, this is pure statistics, this one is the NASDAQ Composite (all NASDAQ Stocks, not just the NASDAQ 100) in red, the Advance/decline indicator as all the indicators is green, look at how the A/D line has fallen apart from the June lows during the month of July and especially now.

 Long term to get a feel for the health of the overall market, look how bad the A/D line is and this is thousands of stocks.

 This is the same indicator, but for the NASDAQ 100 and that is the comparison symbol, again, the A/D can't break to a new high, it can't even come close to where it should be, again this looks very much like a counter trend rally, even though "counter trend rally" has the word rally, it is not bullish, it is part of a bear market.

 Here's the Advance / Decline line for the Russell 2000 which is a benchmark index for the health of rallies. Again note the deterioration in August and since July.

Here's a longer view of the same indicator and R2K, we saw a 20% decline on a divergence in July of 2011, it looked big back then, now it is barely noticeable compared to how bad the divergence is now, this is one of the scariest charts I've seen.