Market Breadth Suggests Trend is Weakening
Market breadth analysis is a key factor in determining the probability of a trend continuing. Much of what I try to do when evaluating market risk is to assess a probability of the market going up versus going down over my time horizon, which tends to be 1 to 3 months. Seasonality often plays a part too, and Q3 tends to be the weakest of the 4 periods. So when the breadth numbers are weak early in the quarter, odds of an increase in volatility are higher. I look at longer-term horizons, but the confidence and risk factors are very different.
While there are many ways to look at how many stocks are participating in a rally, two that I like are the percentage of stocks above a long-term average (200-days) and the percentage of stocks making new 52 week highs. For most of 2017, a very strong market, each new high saw the number of stocks participating in the rally remain quite high. It peaked at well over 80% of stocks trending above their own 200-day averages in January 2018. The percentage of stocks making new 52-week highs was also very strong and increasing for most of 2017 with each market rally. The peak in December and January saw more than 25% of the index making new highs—very strong numbers.
So far in 2018, each subsequent rally has seen relatively low readings compared to 2017. That does not mean a top is in, nor does it mean investors should sell out their portfolios. It does mean the strength of the trend is weakening. All will know in the last 2 weeks the S&P 500 closed back above 2800 a few times, only a few percent from all-time highs. There are fewer stocks leading the market higher and that is troubling. For those using stops and trading the high momentum stocks, I would suggest tightening up your stops. With cash now paying over 2%, it has a higher yield than the S&P 500. We are one antitrust tweet away from AMZN falling 30% and trade wars hitting tech spending hard over the next few years. Antitrust issues are picking up some momentum on Capitol Hill.