Breadth Still Stinks

This week’s Means to a Trend post is running a bit behind schedule. Apparently, so is market breadth.

I last talked about the weak breadth in this market a month ago in a post titled, Breadth isn’t bad. It just isn’t good. And that’s okay. At that time, I noted that it takes TIME to repair structurally broken trends. Last year, stocks experienced their worst bear market since the bottom in 2009 – decline that took 18 months to run its course. It took another 4 years before the S&P 500 reached new all-time highs.

With that context, it’s a bit unfair to expect a broad, healthy uptrend in stocks to begin overnight. Still, with both the SPX and the NASDAQ closing at their highest levels of the year, it’s disappointing that breadth hasn’t shown improvement. In fact, in many ways it’s gotten even worse over the last month.

When we talk about ‘breadth’ in the market, we’re talking about the number of stocks participating in a trend. The more stocks that participate, the healthier a trend is and the more likely it is to last. A lack of bullish breadth – like what we’re seeing in the list of new highs – warns of a weak uptrend.

Less than half of all stocks are trading above their 200-day moving average. Not only are the majority of stocks in technical downtrends according to this measure, but we’ve seen that number consistently grow over the past 4 months, even though the S&P 500 index itself has been rising.

We see the same thing on a slightly shorter-term look. Only 40% of S&P 500 constituents are above their 100-day moving average, and that number is declining.

We can take our trend analysis to the next level by including the direction of the moving average. A stock trading above an upward-sloping moving average can be confidently classified as an uptrend, and vice versa. Today, 41% of S&P 500 stocks are in clean technical downtrends, and only 35% are in uptrends. That’s not signaling the ‘all-clear’ to me.

So how can the index itself be breaking out when trends below the surface are less-than-inspiring? Thank growth stocks. More than half of the members in each Information Technology, Consumer Discretionary, and Communication Services are above their 200-day average. And those three sectors are home to 8 of the 9 largest issues in the market-cap weighted index.

That strength is most apparent when we look at the list of stocks in a regime of new 6-month highs. We’d love to see more stocks setting new 52-week highs, but you have to set a new 6-month high before you can set a 12-month one. 55% of SPX members have set a 6-month high more recently than they set a 6-month low, and the performance within growth sectors is considerably stronger.

But we still need to see more follow through – only 44% of stocks are in a regime of new 52-week highs, and the list of new highs on the NYSE continues to shrink. We simply aren’t out of the woods, even though the indexes are breaking out.

I’ll end with a word of caution to the bears: weak breadth can be overcome. Just because the majority of stocks aren’t participating doesn’t mean we should ignore higher prices. Weak breadth could absolutely be foreshadowing a failed breakout that sends markets back to the October lows. But we could just as easily see the mega caps stall near current levels while money rotates back into weaker areas of the market.