[Premium] Breadth Thrust Suggests Higher Prices Ahead

With India's Nifty 500 approaching the top of its 2-year range and all-time highs, we wanted to run the stats and identify where we stood from a breadth perspective.

When we looked at 52-week highs, not a whole lot had changed, but when we broke it down into 63-day (quarterly) highs we saw a much different picture. In late September we saw the number of stocks in the Nifty 500 hitting a 63-day high spike to the highest level since 2014.

Click on chart to enlarge view.

Using the eyeball method we can see that spikes tend to occur during periods of strong performance, but how high of a spike is needed and how do average returns from that level compared to forward returns on every other day? Great questions, here's what the data suggests.

We have data going back to January 2011, so we looked at 63-day high breadth readings that were in the 90th, 95th, and 99th percentile and calculated the median and average 1, 3, and 12 month returns from those occurrences.

What we see is that average and median returns are better across all timeframes, with the stronger and less frequent breadth thrusts in the 99th percentile unsurprisingly yielding the best results.

For example, the breadth thrust we saw in late September fell within the 99th percentile. Given that, the data suggests median forward 12-month returns are more than double what they are when counting all trading days (20.68% vs 8.96%). Near-term returns shown in the table below are also above average for the three signals we tested.

Click on table to enlarge view.

So does this mean we go out, buy stocks, and hold them for a year?

Not exactly.

This data tells us what we can expect should markets behave how they have historically following this type of breadth expansion. Unfortunately, we do not live in an average world. The US Stock market returns roughly 7%-8% on average, but how many years actually experienced a 7%-8% return? Very few.

Even if we assume the market behaves exactly as it did and we do achieve the average 21.75% return over the next 12 months, we don't know the path it will take to get there.

Will it go in a straight line, slowly grinding higher? Will we experience a 40% drawdown and then experience a massive rally?

Nobody knows.

As a result, we want to use these types of statistics to provide context around market events and set expectations. Much like seasonality data, we'll use these statistics after the fact to identify whether the market behaved in the way history suggested or if it did not...because if it didn't then there may be larger forces at work pulling it in another direction.

That's the information we find most valuable, but for now, this is great context around the strong breadth readings we've experienced and is another data point that supports our bullish structural view of Equities.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team