What Does Market Breadth Tell Us About When We Buy The Dip?

All my valuation models are still off the charts extreme, which means that longer-term forward based returns are likely well below average and correction risks are elevated. Economic conditions overall are supported by massive expectations for more stimulus and central bank support. This factor could/should last into 2022, but you can already see that massive stimulus is getting bi-partisan pushback. There is also a funding problem. The Fed is not buying enough and that can hurt inflated asset markets. You can’t be bullish about this, but it has and can, continue to support the economy for as long as it lasts. Our tactical indicators are mixed. We’ve seen a huge volatility spike (historically a buying opportunity) and sentiment readings from the American Association of Individual Investors is now neutral between Bulls and Bears from extreme readings last month. These factors have reduced the tactical risk factors. So we have come off the more extreme readings of a few weeks ago, but seasonal patterns remain bearish for February and we expect volatility to remain elevated, as policy uncertainty is rising. There was also a notable decay in market breadth in January.

Market breadth indicators do not tell us how far a market can fall or how long it could last, but it does provide some indication on when to look for a bottom. Our chart looks at the percentage of stocks in the S&P 500 above the 50 and 200-day average. We can see in January, more than half of the S&P 500 stocks broke below their own 50-day averages, but the percentage of stocks above their own 200-day averages is still very high. In past corrections this number tends to moderate much more. The rising 200-day average (3350) for many stocks becomes the target once the 50-day average breaks. The S&P 500 closed right on the 50-day average (3715) to close the month. By the end of February, that rising 200-day average is likely in the low 3400’s. A close below the 50-day average for the S&P 500 would likely see momentum sellers pick up the pace.

Look for more in the coming weeks from our new Berman’s Call Probable Return on Investment Index, PRO-II (pronounced Pro Eyes) Indicator. We will be launching the new website soon so that BNN viewers can follow along with the various risk and opportunity factors we follow.

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