May Market Breadth

Chart 1: NYSE high low ratio is resembling a pattern similar to '07 & '11!

NYSE High Low Ratio Source: Short Side of Long

The recent NYSE 52 week new highs & lows data continues to show bearish divergence discussed last over the last few months. The chart above displays a rising broad market, while the number of new highs relative to new lows is slowly, but surely decreasing. We have seen similar market breadth conditions to these near major market peaks before. These include the peak in 2007 and 2011.

Consider that in late December 2013, the NYSE ratio between new highs and lows stood at 319 as S&P 500 flirted with 1,850. While S&P rallied towards a higher high in March of this year, breadth ratio only managed to post a reading of 291. Recent record intra day highs at 1,902 on the S&P have proceeded with an even lower ratio numbers of 151.

The current bearish breadth divergence between the rising index and fewer new highs, has actually been in progress for several months now (since October 2013) and is usually a warning signal of a possible market top.

Chart 2: Last months technology breakdown is still not oversold just yet

Nasdaq High Low Ratio Source: Short Side of Long

With a strong sell off in Nasdaq, certain market analysts have concluded that the beaten down names have now become bargains. Personally, I am not so sure about that. Nasdaq has been in a exponential rise up to this point, coupled with weakening breadth. As that trend broke down over the last several months, I doubt the recover will be anything but swift.

Usually, but not always, the market takes its time to consolidate or even become oversold, as it swings from positive to negative expectations. Furthermore, investors should keep in mind that since Nasdaq lead the bull market since March 2009 lows, it could also be a leader into the next downturn.

Chart 3: Long term advance decline line is triangulating as rally pauses

NYSE Advance Decline Line Source: Short Side of Long

Recent advancers vs decliners have been rather weak, as the S&P 500 continues its consolidation with no major progress since Fe'd taper was announced. While the cumulative AD line continues to rise, the strength from the 5 day, 10 day and 21 day AD lines are all quite weak. In other words, recent internals have not been that strong, despite the fact that S&P 500 is only 1% from its record highs.

Moreover, the chart above shows breadth accumulation and distribution over the longer term (3 month average). Interestingly, for reasons unknown to me, the advancers vs declines have been triangulating into a more narrow range. I believe a decision out of this technical setup could impact the stock market in a more meaningful way, so this chart stays on my watch list in coming months.

Chart 4: US equities remain overbought from the long term perspective 

Stocks Trading Above 200 MA Source: Short Side of Long

Even though the average stock within the S&P is actually down by a handful of percentage points, while the index itself trades at near record highs, it is important to underline the fact that the market is not ripe for a buying opportunity. We are not oversold from the long term perspective.

Obviously, traders will argue differently, but my style is one of longer term investment. Great buying opportunities presented themselves during Nov '08 to Mar '09 and from Aug '11 to Oct '11. At present, the market actually remains quite overbought and overextended for a rather long period already. If anything, we are overdue for some meaningful selling.

Chart 5: Weakness is now more pronounced with stocks above 50 MA!

Sector Breadth Source: Short Side of Long

Breaking down the breadth strength in S&P sectors, we can see that long term readings remain in the uptrend (apart from Gold Miners). While some are weaker than others, majority of the participation is coming from late cyclicals (Industrials) and defensives (Utilities).

At the same time, early cyclicals and economically sensitive sectors have shown signs of weakness. Sectors like Technology, Consumer Discretionary and Financials are also not confirming record highs in Dow Jones and S&P 500. Historically, similar conditions have occurred near major market peaks in 2000, 2007 and 2011. I guess, this is yet another reason to be cautious.

4 replies on “May Market Breadth”

  1. theyenguy says:

    On Tuesday, May 20, 2014, investors greed turned somewhat more to fear, specifically fear that the world central banks’ monetary policies, no longer sustain investment gains and global economic growth, and have made money good investments bad.

    Global debt deflation commenced, as currency traders strongly sold the Australian Dollar, FXA, which turned Major World Currencies, DBV, parabolically lower with the result that Gulf States, MES, Australia, EWA, KROO, New Zealand, ENZL, Indonesia, IDX, IDXJ, Thailand, THD, Malaysia, EWM, South Africa, EZA, Norway, NORW, Brazil, EWZ, BRF, Turkey, TUR, Chile, ECH, Egypt, EGPT, Emerging Africa, GAF, Columbia, GXG, and the US Small Caps, IWM, IWC, led Nation Investment, EFA, and Small Cap Nation Investment, SCZ, lower.

    With the Australian Dollar, FXA, now following the Euro, FXE, lower, investors are derisking out of debt trade investments, and delveraging out of currency carry trade investments in Global Industrial Producers, FXR, Industrial Miners, PICK, Small Cap Industrials, PSCI, Transports, XTN, Metal Manufacturers, XME, such as CMC, WOR, GHM, SCHN, GSM, STLD, RS, HAYN, CVR, MLI, CSTM, CRS, Steel Producers, SLX, Aerospace and Defense, PPA, Global Energy Producers, IPW, and Timber Producers and Paper Manufacturers, WOOD.

    And investors resumed the sell of Solar Manufacturers, TAN, Biotechnology, IBB, US Infrastructure, PKB, Retail Stocks, XRT, such as PETM, URBN, TJX, CBK, BKE, EXPR, DEST, GES, DSW, CHS, GCO, ROST, DXLG, ANF, PLCE, TGT, BBY, DKS, Regional Banks, KRE, Small Cap Pure Value Stocks, RZV, and Small Cap Pure Growth Stocks, RZG.

    The sell of Far East Financials, FEFN, Japanese Banks, SMFG, MTU, MFG, Australia’s Bank, WBK, Regional Banks, KRE, Investment Bankers, KCE, and Stockbrokers, IAI, led Global Financials, IXG, lower.

    With the May 20, 2014, sell of Transportation Stocks, XTN, we have Dow Theory confirmation of a bear market, as the Airlines, Truckers, and Railroads, are joining the Industrials, XLI, in trading lower. The market direction trading pairs, XTN, XLI, and IYJ, IYT, are indicating a stock market reversal in World Stocks, VT, is in place.

    Competitive currency devaluation coming from the hands of the currency traders, has commenced the destruction International Energy Investments, such as, RDS-B, SSL, E, TOT, STO, and Mining Investments, such as BHP, VALE, RIO, CENX, AA, HW, GSM, as well as the destruction of Yield Bearing Investments.

    The May 20, 2014, trade lower in Gulf Dividends, GULF, Australia Dividends, AUSE, Water Resources, PHO, Global Real Estate, DRW, Global Telecom, IST, Smart Grid, GRID, Leveraged Buyouts, PSP, European Small Cap Dividends, DFE, and Dividends Excluding Financials, DTN, from their highs was an epic economic event: the investor, specifically the fixed income investor is going extinct.

    The trade lower of Call Write Bonds, CWB, and the turn lower of Defensive Shares, DEF, such as Transports, XTN, International Energy, IPW, Global Agriculture, PAGG, Consumer Staples, KXI, Global Real Estate, DRW, and Global Telecom, VOX, from their rally highs, communicates the failure of credit and the termination of profitable equity investing. Of note, Zero Hedge reports Caterpillar Retail Sales Plunge By 13%, Most Since February 2010; Caterpillar, CAT, traded 3.5% lower on the day.

    Outside of the Precious Metal Mining Stocks, Gold Mining Stocks, GDX, and Silver Mining Stocks, SIL, SILJ, the Banker Regime is no longer able to securitize any investment, nor market any any investment that will preserve wealth.

    The see saw destruction of fiat investments, that is Equity Investments, such as World Stocks, VT, Nation Investment, EFA, Global Financials, IXG, Dividends Excluding Financials, DTN, as well as Credit Investments, AGG, has commenced, as the bond vigilantes have control of the Benchmark Interest Rate, ^TNX, which traded lower to 2.51%, but remains above support at 2.49%.

    The trade lower in Aggregate Credit, AGG, from its May 15, 2014 high, is of historic importance. With both Equity Investments and Credit Investments trading lower, the world has passed through an economic inflection point. The world has pivoted from the age of currencies and the age of credit … and into the age of diktat and the age of debt servitude. On going disinvestment of currency carry trades and debt trades will introduce the much feared economic on a worldwide scale

  2. […] look at some other breadth measures.  (Short Side of Long, Humble […]

  3. […] a quick update from the previous post on May Market Breadth. The chart above was sent to me by a friend and it comes from Fusion IQ plus Bloomberg data. […]

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