A Look at One Market Breadth Indicator That’s Positive

One element of technical market analysis that is often a leading indicator is called breadth analysis. There are many different breadth indicators. Today, we look at the percentage of stocks above their own 200-day average given that we bounced off that level again last week. For the analysis, we are looking at the Russell 3000, one of the broadest measures of the U.S. equity market that includes the S&P 500 (large-cap), the S&P 400 (mid-cap) , and the Russel 2000 (small-cap) groups of companies.

Over the past few months, we have seen this broad market index test the 200-day average several times. No doubt a break of this important support would see many weak holders sell, as the psychology of the bull market changes. For now, we see weakness as a buying opportunity, though as we get closer to the next recession, that bias turns to sell the rallies. Our best guess for that next recession is late 2019 early 2020 based on the most likely path of Fed tightening.

To be sure, this narrowing trend is important to watch for a break. One indicator tilting our view to the upside is the percentage of stocks above the 200-day average. On the most recent test, while the 200-day average keeps rising, we saw fewer stocks breach that level, which have been mostly the small cap stocks. Small caps have benefitted most from the Trump tax cuts compared to the large multinationals that have been reducing tax for decades with foreign tax haven structures. Small domestic companies typically do not have this ability.

Bigger picture, it will be tough to sustain the higher market multiple as monetary conditions tighten. So while we could make one more new high later this year, we would not be looking for a sustained rally. Today, the FANG stocks are over 10 per cent of the broad market. If you add MSFT and a few others like INTC, there are a small handful of stocks that control a huge part of the indexes. FB and GOOGL are the most vulnerable with AMZN and AAPL as the leaders.

Our bet for now is that the S&P 500 can get back to the 2800 area later this summer, but we are doubtful we see a broad market breakout. Earnings have been good and the bull is hard to kill if earnings are still growing. That said, the economic numbers are weakening and those to trends will clash at some point in the not to distant future.

Our final event of this segment of the Berman’s Call roadshow is a Webinar on Wednesday, May 9 at 2 p.m. ET, for those of you who could not make it out to one of our live events. Register free by clicking here. This season our fundraising efforts generated about $100,000 for Alzheimer’s research at The Baycrest Hospital and about $25,000 for children’s Cancer research at The Hospital for Sick Children.

Watch Larry discuss this topic in a video segment on BNN.ca

Share your thoughts and comments