Diverging Internals Confirm The Action In The Indexes

Steve Strazza
May 20, 2021

From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @GrantHawkridge

In recent months, we've seen a rare bid in defensive assets as investors position for more mixed markets and messy action in the weeks and months ahead.

These defensive areas of the market have stopped trending lower on relative terms and many are rebounding off of very logical support levels... Gold Miners and Bonds are two examples of safe-haven assets that we recently got involved with on the long side in order to express this view.

Now add the following developments to the mix:

In this post, we'll focus on the last bullet point and take a look at what's going on under the hood in some of the major averages. Or rather, what's NOT going on...

So with all this considered, we should expect to see an expansion in new lows... Right?

We continue to ask ourselves this question and look for early signs of deterioration when analyzing market breadth.

Most stocks are still miles above their 52-week lows, so we aren't going to see much action in our new 52-week low indicators. Much of this is due to timing as the market made such a swift drop and subsequent rally during Q1 of last year.

This is also simply a byproduct of where we are in the current cycle. Before we even want to look to see if new lows are expanding over longer timeframes, we'll have to start seeing the number of new lows increase over shorter timeframes.

So, let's do just that! Here's a look at the percentage of new 21-day lows in both the NYSE and NASDAQ right now:

There are certainly no alarms sounding off when it comes to the NYSE. As you can see, new monthly lows are muted and trending lower as price continues to grind higher. This is simply business as usual.

As we continue to pound the table on the relative trend reversal in favor of value stocks, it should come as no surprise to see the value-heavy NYSE look this solid under the hood. It's also worth noting that the difference in new lows between these two exchanges also has to do with the fact that the NYSE has much more exposure to international equities - or ADRs, than the Nasdaq does.

The Nasdaq has much more exposure to both the US and more importantly - to growth and tech stocks.

In fact, by design, the NASDAQ holds almost no value stocks at all.

So, let's see if this weakness has carried through to more intermediate timeframes yet. Here is a look at the percentage of new 63-day lows now:

Yes… There is a clear expansion in new 63-day lows for the NASDAQ. So the weakness we're seeing in the price chart is being confirmed by deteriorating internals. In fact, the number of new lows is moving higher even as price makes slightly higher lows. 

This is a bearish breadth divergence and definitely one we want to keep a close eye on.

And once again, when we contrast this weakness with what's going on beneath the surface in the NYSE - which has far more value exposure, we see no cracks in breadth at all. In fact, breadth indicators continue to confirm the new highs in price at the index level.

So what if we start to see this internal weakness in the Nasdaq start to take place across to longer timeframes? In that case, we will be on close lookout for that "first fall day."

But we haven't seen it yet! So until then, we can only continue to monitor these indicators for further deterioration. 

Do you agree? Let us know what you think and if you have any questions!

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Allstarcharts Team

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