Market Analysis: 2014 Market Analog (?)

50dma breadth is a useful tool for gauging short-term market bottoms. At present, 44% of SPX stocks are above their 50dma, which is just above the YTD lows of around 40%. If the market wants to hold 40% level, then the selling is almost finished. But given the poor seasonality and deteriorating longer-term breadth (i.e. 200dma), I believe the market is on its way to the 25% line before it bounces. As Jeff Saut likes to say, markets “never bottom on a Friday”; so perhaps we get a Monday breadth washout. But who cares about the timing – what matters is that the odds do not favor a bounce from current levels.

While market analogs are dangerous – particularly idiotic price-driven analogs – I do like indicator analogs, because the market behaves similarly around tops and bottoms. As such, since market breadth and demand began really rolling over this spring, I have had my eye on an August-October 2014 analog. IMO, the recent Ritholtz/”Down Town”/”Common Sense”-scolding-of-the-value-guys environment *feels* very similar to 2014; but more importantly, underlying market demand has rolled over in a similar fashion to 2014 as the market enters the volatile July-October time period (unfortunately I cannot show the chart).

If the 2014 50dma breadth pattern holds, the market will bottom at 25%, then rally to new highs in order to give the buy-the-dip crowd a quick victory lap before descending to new lows and bottoming around 15% breadth.

Of course, this analog may not hold and we could descend straight down by another 10%. But looking at the weight of the indicator evidence suggests the buy-the-dip environment should produce more of a choppy, two-step correction.

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