Market Breadth is (Still) Weak and Getting Weaker

Measures of market breadth can give us important clues as to what is happening underneath the surface of major stock indices so we can make better decisions. For instance, when we see that a preponderance of stocks are trading below their 200 day moving average, there is a good chance the market is oversold and likely to rally. By the same token, when we observe that a large percentage of stocks are making new 100 or 200 day lows it is a good indication that the particular index has experienced a selling climax and is therefore unlikely to sustain significantly deeper losses. Unfortunately for stock investors, neither of the above mentioned conditions currently hold true today. Rather, we are (and have been) noticing what we characterize as a divergence between market breadth and stock index prices (i.e. the average stock is acting weaker than headline stock indices). This is troubling because when stock market advances are sustainable market breadth indicators confirm index strength by making higher highs, thus demonstrating a high degree of individual stock participation in the rally - the opposite also being true.

In the example below we present the percent of stocks making new 100 day highs in price (blue line) and compare it to the price of the MSCI regional indices (red line). The pattern we want to highlight in this post is the following:

1. New 100 day highs expanded off the June 2012 low fairly consistently until finally reaching an apex in late October 2013, all the way confirming the strength in the index price
2. Around the new year, indices made new cycle highs, but the percent of stocks making new 100 day highs was lower than in October 2013
3. Around February 19th, stock indices again made new cycle highs, but the percent of stocks making new 100 day highs was even lower than the reading around Jan 1
4. On March 6th, stock indices again made new cycle highs and this time the bounce in new 100 day highs was not even observable

So we are now in a situation where the past three stock market highs have been achieved with an ever narrowing list of stocks making new highs. That is an unsustainable situation, which generally points to lower prices unless broad stock participation picks up meaningfully. We will be watching for exactly that on the next rally attempt.