US Stock Market Breadth Continues To Drive Stocks Higher

JC Parets
August 21, 2018

My favorite one lately is when the bears tell people that US Stock Market Breadth is deteriorating. It's hilarious.

Their sorry excuse for a thesis has them suggesting that there are fewer stocks participating to the upside in the U.S. Stock Market, when nothing could be further from the truth. I've been pounding the table that we continue to see an expansion in participation, which is characteristic of an uptrend and we have wanted to be buying stocks very very aggressively. That has worked out well. See here, here, here, here, here, here and here.

The reason I keep bringing up breadth expansion, not contraction, is because it's my job to constantly be reevaluating the data as it comes in. It's incomprehensible to me that someone could think that breadth is deteriorating. What the hell are they looking at?

Today, we're turning our attention to the Value Line Arithmetic Average, which was created in 1988 specifically to more closely mimic the change in the market if you held a portfolio of stocks in equal amounts. In other words, rather than a market-cap weighted index like the S&P500, where the largest names represent the largest weightings, or a price-weighted index like the Dow where the highest priced stocks carry the largest weight, this Value Line Index is an unweighted mean.

This gives us a better idea of what the average stock is doing, so we don't get data skewed by price or market cap. This is one of my favorite breadth indicators and it just went out at a new all-time high. If the bears were right, for once, and breadth was indeed deteriorating, the Value Line Arithmetic Index would NOT be breaking out of a multi-month base to new record highs:

The idea here is that with new highs in the S&P500 and other major U.S. Indexes, we want to continue to see the expansion in participation that we've seen the past few quarters, not the deterioration that stock market bears have blatantly been lying to you about.

Back in 2007, we saw deterioration in breadth prior to the US Stock Market peak in the fall. Notice how we got new highs in the S&P500 into October of that year, but the $VLA was putting in a lower high. This bearish divergence, among many others at the time, preceded any stock market sell-off:

Today we are not seeing that at all. In fact, the Value Line Index is actually leading stocks higher, which is the exact opposite of breadth deterioration. We look to this expansion as further evidence of an uptrend in stocks:

When we see a weakening market, I'll be here talking about it. You guys who have been reading this blog for a long time remember my comments throughout 2015. Breadth was weaker then. But not today.

Today we're seeing breadth expanding. We're seeing sectors rotating. These are things we see in uptrends. Until that changes, we want to be buying weakness in stocks, not selling into strength.

What do you think?

JC

 

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