[Premium] Market Breadth Update

JC Parets
July 7, 2018

Now that we're halfway through the year, it seems like an appropriate time to review market breadth both globally and within India to identify how we want to be positioned in equities during the second half of this year. In this post we'll do just that by looking at all of the global equity markets and Nifty sectors we track to determine their trend and momentum readings across multiple timeframes, so that we can come to a conclusion based upon the weight of the evidence.

Below is a chart of the 46 International Equity Markets we track in their local currency terms, along with their performance YTD and from important dates such as January 26th when the S&P 500 topped and February 15th when the Dollar Index bottomed. Additionally, in the columns on the right I've recorded the trend and momentum characteristics for each on both a weekly and daily timeframe. What we can see is that the median stock market in the world is down roughly 8% since January 26th, 3.6% year-to-date, and has gone 101 days without making a new 52-week high.

Click on chart to enlarge view.

Table data as of 06/30/2018.

What I think is more important to highlight is that from a structural perspective, 19 markets are in uptrends, 21 are in sideways trends, and only 2 are in downtrends. Additionally, 37 have momentum in a bullish regime compared to 5 bearish, but of the 37, more than half have bearish momentum divergences. So from a structural perspective, the evidence suggests that a bullish / neutral stance remains appropriate.

When we break it down to a tactical perspective, things get a little more messy. Currently there are 10 uptrends, 32 sideways trends, and 4 downtrends. Momentum is in a bullish regime for 17 markets, with 7 of them having bearish divergences. Momentum is in a bearish range for 29 of them, with 15 of them having bullish divergences. What's clear is that tactically, there are more uptrends than downtrends, but the vast majority are in sideways trends.

There are less uptrends than there were two months ago, but sideways trends are not inherently bearish. Yes, they represent a change of trend, but since consolidations generally resolve themselves in the direction of the underlying trend (which in most of these markets is higher), a bullish/neutral stance remains appropriate.

Now that we've established a bullish/neutral stance for equities as an asset class, let's perform the same exercise with the 14 Nifty sectors we track. From the Nifty 500's high on January 24th, the median sector is down 7.45% and down roughly 7.31% year-to-date, and has gone 116 days since making a 52-week high.

Table data as of 07/06/2018.

From a structural perspective, 5 sectors are in uptrends, 3 are sideways, and 5 are in downtrends. 10 have momentum in a bullish regime compared to 3 in a bearish regime, though 7 of the 10 in a bullish regime are exhibiting bearish momentum divergences. Tactically the results are similar, with 5 in an uptrend, 3 sideways, and 6 in a downtrend. 6 are in a bullish regime with 5 bearish momentum divergences, and 8 are in a bearish regime with 3 bullish divergences.

With an equal number of uptrends and downtrends, it's clear that our neutral stance has been appropriate, despite the bullish stance in equities as an asset class. Until we start to see a majority of uptrends or downtrends in the Nifty sectors, our best bet is to continue to focus longs in the strongest sectors and shorts in the weakest.

So what do we want to see? We want to see new highs in the broader market with an expansion of participation. One way to track that is through the percentage of new 52-week highs and percentage of stocks with momentum hitting overbought conditions in the Nifty 500. While I understand this is an overly-simplified way of looking at it, the rationale is that if we see this it's likely happening in an environment where the majority of these downtrends are stabilizing and sideways trends are resolving higher and turning into uptrends, not resolving to the downside.

We'll be watching the charts above, but for now we still see confirmation of new lows in price from the 52-wk lows and % of RSI hitting oversold conditions. We want to see these numbers decline.

The Bottom Line: There has been a slight deterioration in global stock market breadth over the last few months globally, but shifts from uptrends to sideways are constructive ways of digesting gains and working off many of the bearish momentum divergences that developed as prices moved higher. Since consolidations generally resolve themselves the direction of the underlying trend, equities remain "innocent until proven guilty". In India specifically, there continues to be an equal number of uptrends and downtrends, which suggests that a neutral approach remains appropriate until we see a decisive shift to a majority of uptrends or downtrends.

In this type of environment we want to continue to focus our long efforts on those areas of the market showing relative strength, and avoiding or shorting those that are showing relative weakness. For those in sideways trends, the best answer is to wait for a resolutions.

We've written at length about the sectors we want to be involved in on both the long and short side over the last few months, but you can find all of them charted on an absolute and relative basis in the Nifty Sector Chartbook.

Thanks for reading and let us know if you have any questions. Also, check out the new Breadth Chartbook here.

Allstarcharts Team

Filed Under: