Market Analysis: Bad Breadth

DISCUSSION 

The latest Cracked Market blog post highlights well the current buy-the-dip attitude of index-focused market participants. 

Frankly, it’s quite strange. A mere cursory look at underlying demand measures such as a basic 200dma breadth chart reveals an equity market that is carving out a textbook “negative divergence”. 

Whatever. The market will do what it wants when it wants. But short-term indicators suggest the market is close to resuming its corrective price action. 

ANALYSIS

Macro Conditions

Macro mavens can pontificate on podcasts and inter-webs the world over in search of an explanation for why the equity market continues to “defy” expectations. But it could not be more simple: The US economy continues to expand. Limited competition from bonds, wide open credit markets, persistently high margins, low inflation, pension fund flows, “under invested” households are all CNBC Fast Money Half Time talking points. They mean nada.

Long-Term Breadth

But within a strong longer-term uptrend, the market is going to work its way thru 5-15% corrections. Breadth measures currently suggest the market is setting up for such a correction. 

S&P 500 200dma breadth continues to negatively diverge from the index, which is within spitting distance of its YTD highs. With the market entering the historically volatile September/October time frame, odds favor the index “catching down” to breadth. 

Weak 200dma breadth is confirmed by the falling percentage of stocks with a 50dma > 200dma…

…As well as the severe negative divergences within the DAX and CAC indices. 


Short-Term Conditions 

SPX 50dma breadth declined to relatively oversold levels, but has yet to touch levels associated with durable bottoms that lead to upside “breadth thrusts”. I suspect this puke rally will fizzle with 50dma breadth no higher than 60%. 

And lastly, market sentiment has yet to drop to fully oversold levels. 

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