[Table Of The Week] Global Breadth Remains A Headwind For Stocks

May 14, 2020

From the desk of Steve Strazza @Sstrazza

Breadth divergences from earlier this year took a while to confirm, but once they did we saw considerable downside.

My Chart Summit Presentation was on how I use statistics and scans to visualize market internals for insight on breadth and relative strength. I used tables from our Weekly Momentum Reports in January and February to illustrate the clear deterioration in participation taking place at the time despite the major indexes grinding to new highs.

In this post, we’ll do a similar exercise and use stats to analyze whether breadth has been improving or deteriorating in Global Equity Markets over the past month.

Most diversified Global Equity Indexes rallied hard into the week ended April 17th and despite many making slight incremental highs since, the majority have gone more or less nowhere with prices right back where they were about a month ago.

Here are some examples of major International Indexes from four different regions of the globe.

As you can see, these indexes have all gone nowhere. We're seeing similar action in most of the diversified International ETFs we track as well.

Since little has changed in terms of price in the past month, we need to look under the hood at breadth measures between these two periods to get a feel for the true health of global markets. Whether internals are strengthening or weakening beneath the surface when markets are rangebound can help provide an early indication of how things are likely to resolve.

Let's look at a comparison of breadth metrics right now vs April 17th in our list of over 40 Internation Equity Indexes, and see if we can glean any insight into the future direction for stocks.

If the last month's consolidation is building steam for another leg higher, we'd expect to see momentum improving, more overbought readings and an expansion in new short term-highs at the individual index level. We are not seeing this at all.

What we are seeing is a lot of the same. Here are some highlights from the summary statistics at the bottom.

To reiterate our point that prices have more or less remained the same in these indexes, notice how the median drawdown has only improved a measly 1% over the past month from 24.44% to 23.59%.
If you make an exception for some rare strength out of obscure markets like Lithuania and Argentina the same amount of indexes are in a bullish momentum regime today as were back in April... Zero.
It's one thing not to be able to achieve an overbought reading, but we at least want to see momentum working its way higher. It's not. The median RSI is actually slightly lower today than it was in April.
The majority of these Indexes are still trapped below key lows from 2018 which is something we want to see improve. Over the past month, just one additional index has been able to eclipse those key prior lows.

While we're definitely not seeing improvement in any of these metrics, there is one that we're noticing significant deterioration in... new short-term highs. Over 75% of indexes had made a new 21-day high during the week of April 17th. In the trailing week, only 25% of indexes have achieved a new 21-day high.

A deterioration in new short-term highs while momentum and price remain at a stand-still is something we're also seeing in many US and International Index ETFs recently.

In fact, let's take a quick look at our International ETF Momentum Report from the week ended April 17th and compare it to what we're seeing today.

Again, let's focus quickly on some of the summary statistics at the bottom.

The median RSI was 52 back then, compared with 50 today.
The median drawdown hasn't budged, still at 29% today.
One noticeable difference is that over 2/3rds of our 54 International ETFs made a new 21-day high during the week of April 17th. Compare this with only 17% making a new 21-day high in the current trailing 5-day period.
Last but not least every single ETF on our list remains in a bearish momentum regime.

As it stands, we've had essentially no overbought readings during the rally off March's lows in any of the International ETFs or Indexes we track. This is definitely a cause for concern.

In order for us to believe the recent run is anything more than a bear market rally, we need to see some of the more important Global Indexes and ETFs transition from a bearish to bullish momentum regime. Considering most readings are still meandering around the 50 level in these indexes, it doesn't look like they're on track to accomplish that anytime soon.

When we combine this waning momentum, trendless price action, and negative divergence in short-term new highs with the recent bearish reversal patterns in many indexes, it seems the counter-trend move in stocks may have run its course.

In our opinion, risk has definitely shifted back to the downside in the coming weeks/months as it will be difficult for even the strongest markets, such as the US to have staying power in light of such weak breadth around the globe.

Be sure to read our recent short trade ideas as we continue to bet against the weakest areas in US and Global Equity Markets in order to express our bearish thesis.

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

Allstarcharts Team