Chart 1: Less and less stocks continue to make 52 week new highs
Source: Short Side of Long
Let us quickly observe the US equity market breadth with some classic indicators like stocks making 52 week highs and percentage of stocks above various moving averages. The chart above shows how the initial recovery out of the bear market lows in 2009 spurred majority of the companies and pretty much all of the equity sectors to rally towards 52 week new highs into early parts of 2010.
Share participation remained strong until later parts of 2010 as the market was just about to start its topping process and what followed was a major correction as QE2 ended in mid 2011. The recovery out of the October 2011 low has seen less and less stocks make 52 week new highs, especially since the beginning of 2013. Apart from mild bumps, so far this has not yet affected the equity index rally.
Chart 2: US equity market hasn’t been oversold since October 2011
Source: Short Side of Long
Another way of looking at the 52 week new highs and lows data is to develop a ratio as seen in Chart 2. Based on various components making 52 week new highs or lows, we can monitor the internal strength or weakness and determine whether the market is overbought or oversold. It needs to be said that during bear markets, similar to October 2007 to March 2009, markets can stay oversold for a prolonged period; while during bull markets, like the current advance from March 2009 until present, markets can stay overbought for a prolonged period of time. Having said that, it has been a long time (since October 2011) since the equity market has been truly oversold and within that context sooner rather then later we are overdue for a proper pullback.
Chart 3: Less and less stocks continue to trade above the 50 MA…
Source: Short Side of Long
Declining participation in the current bull market is also evident in the percentage of stocks trading above the 50 day moving average (refer to Chart 3) and 200 day moving average (refer to Chart 4). Furthermore, just as NYSE High Low Ratio confirms, according to Chart 3 & 4 the stock market has not experienced a proper correction since at least June 2012 and more like October 2011. Finally, a prolonged bearish divergence between the index price and percentage of stocks above 200 MA remains in place (see Chart 4) and so far has not yet affected the overall rally. However, if the readings fall below 75%, the signal could be taken as a possibility of uptrend termination.
Chart 4: … and percentage of stocks above 200 MA continues diverging!
Source: Short Side of Long
