Someone Pass The U.S. Stock Market A Breadth Mint

JC Parets
May 16, 2017

We live in a world of if/then statements. That's just the way it is. I don't know what's going to happen tomorrow, or next month or next year. But that's okay because no one else does either. That whole lie about "uncertainty" is just that: a lie. There is always uncertainty. That's the point of all this. So we do our best to put together a road map filled with if/then statements. If the market does this, then we will do this. If that market does that, then we'll have to do that. This is the case today, it's been no different in the past and will likely be the same in the future. I don't know of any other way to manage risk responsibly.

These if/then statements are always changing, of course. The big question mark today is whether or not the U.S. Stock Market will begin to see an improvement of breadth, or if the deterioration will continue. In the past I've outlined some of my favorite breadth measures. Most of these are not confirming the new highs we're seeing in the S&P500 this week. But that statement is not fair on its own. The word "yet" needs to be added to the end of that sentence. That's how this works.

On Monday the S&P500 closed at a new all-time high. Looking back at over 200 years of data in assets and markets all over the world, new all-time highs are simply not a characteristic of a downtrend. The smart-asses like to tell me that, "all downtrends begin with new highs". It's one of those things where you just can't help those types of people. That backwards type of mentality is not something I can relate with. New highs normally lead to more new highs. Markets trend. Period. This is not an opinion. It's a fact.

So what do we want to see as U.S. Stock Market bulls? (yes I am one of them). We want to see breadth improving, not deteriorating. Here are a few things I'm watching for right now:

  1. With new all-time highs in the S&P500 this week, zero traditional S&P Sectors hit new all-time highs. Normally we would see at least 3 or 4 sectors participating. But not this time. This needs to change quickly (note: Tech did hit new 52-week highs (again), but still has not exceeded the 2000 yet. So yes Tech is still the leader)
  2. Both the S&P500 Advance/Decline line and the NYSE (common stocks only) Advance/Decline line have been declining for months. An argument can be made that they've gone sideways and just haven't broken out yet. This doesn't necessarily make it bearish, we just want to see these break out soon to confirm the bullish action in price. See the difference?
  3. The list of new 52-week highs on the NYSE (common stocks only) and S&P500 have been deteriorating for months: lower lows & lower highs. With new highs in the index, the list of stocks participating in those new highs has been contracting, not expanding.  Again, like the others, this can change quickly. If the S&P500 really breaks out to new highs and doesn't just squeak by barely making a new high like it did Monday, then we are likely to see a major expansion of participation. We want to see that for sure if we get a real breakout from this 10-week basing period.
  4. We have been seeing stocks participating with bullish momentum characteristics deteriorating as well. With new highs in the S&P500 in March and this week, fewer and fewer components are showing bullish momentum characteristics (I define this by RSI exceeding 70). Like in the points I mentioned above, this can change very quickly and the deterioration the past several months while markets consolidated does not necessarily make it bearish. It just means that if we get real new highs, we need to see an expansion of stocks in the S&P500 (and more importantly the Russell3000) reaching overbought momentum levels (above 70 in RSI).
  5. Finally Dow Theory. Transportation stocks have been a great leading indicator for years. They peaked 6 months before the Dow Jones Industrial Average in 2015 and bottomed the month before the Dow Jones Industrial Average in 2016. So with new highs in the Industrial Average (which we have not seen yet), we want the Dow Jones Transportation Average making new highs shortly thereafter. The sooner the better.

There are a few more things I like to see such as other countries and continents participating as well. We want to see an expansion in global participation and I have a few ways to measure this. Here is one example.

The point I want to make here is that it's time for a breadth mint to be handed to the U.S. Stock Market. We want to see breadth improvement as U.S. Stock Market Bulls, which we are. The weight of the evidence is suggesting that we're most likely going to get it. BUT, we need to see it. Hence the if/then statement. If we don't see it, then a reevaluation of my bullish thesis is most likely necessary.

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