How Breadth Deterioration Resolves
July 14, 2021
≈ It Doesn’t Always Bring Destruction ≈
Traders,
One of my favorite ways to measure the percentage of stocks in an uptrend is to use the 50-day moving average. Those above it are bullish, and those below it are bearish. The healthiest markets see widespread strength across all sectors. The more uptrending stocks in each sector, the better. With the recent fallout in cyclicals, we’ve seen a sharp deterioration in market breadth. Leadership is narrowing, and fewer and fewer stocks are powering to new highs.
Do you know what percentage of the S&P 500 members are above their 50-day moving average right now?
50%.
It’s lower than you’d think, given the Index is sitting near a record high. But there are two ways for a breadth divergence like this to resolve itself.
First, the laggards could eventually drag the major indexes lower. And that’s certainly what bears are hoping for. Or, they don’t.
Second, money rotates back into the likes of Materials, Financials, and Energy. The participation broadens, and the breadth divergence disappears. This would be the best outcome for bulls.
Remember this next time some nervous nelly points out a spooky divergence. They don’t all resolve themselves with asset prices falling.
Chart of the Day
Stocks above 50-day MA
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