The markets are at or near all time highs. The optimism is overwhelming. Consumer confidence just roared in with a triple digit positive reading of 104 and this is only the third time in history the confidence has been so high. What's not to like? Breadth is an important feature of technical analysis as it ranks how many stocks are participating. Greg Morris has written entire books on breadth, so I won't attempt to cover it all off in one blog. So what is breadth? Breadth measurements help us understand how many participants out of a group of stocks are involved. The old joke about 6 workers leaning on a shovel and watching while one worker digs a trench is a good analogy. The lack of participation means it will be a long time before the trench is finished because not a lot of people are helping.
In the equity markets, we can use groups like the S&P 500 to measure the big caps or groups like the NYSE Composite which includes all the listings on the New York Stock Exchange. To keep it simple, I will use two examples of breadth. One is the percentage of stocks on a buy signal on a PnF chart which are called Bullish Percents. More information on Bullish Percents can be found on this link to the Chartschool article. Bullish Percent Indexes. The other is the number of stocks above or below a moving average. In this case we'll use the long term average of 200 days. The indicator is specific to each group and the $SPX indicator is $SPXA200R. (The percent of stocks above the 200 DMA).
In the top panel, there are two things going on. One is the value (price) of the $SPX shaded in grey. The other is the Bullish Percent Index. When the market is above 65 it has lots of breadth and moves higher. Markets above 75 have lots of breadth with more than 75% of the stocks pushing higher. One of the issues on the chart below is the downward dotted line where every rally has less and less stocks returning to buying signals after pulling back. The current reading is marked by the lime green line. If we look left on the chart, the major declines occur when the market cannot rally back above 65. Those are the areas to worry about. Recently our rallies back up to 75 were ok, but the $SPX has waddled sideways since the beginning of the year. Not enough participation to make meaningful new highs.
Continue reading "5 Charts To Chill The Heat" »