Breadth Improvement? Or Just Less Bad?

JC Parets
October 15, 2022

In yesterday's note we talked about how the Dow Jones Industrial Average went up in price for the 2nd consecutive week. This isn't something we've seen happen too often in 2022.

But what else happened this week?

Well, we got fewer stocks making new 52-week lows on the NYSE. The peak in new lows was back in June, which was 4 months ago.

You can see it in shorter-time horizons as well. Look at the S&P500 new 63 day low list continuing to deteriorate (63 days = 3 months = 1 quarter):

So is it a matter of "Breadth Improvement"?

Or are things just "Less Bad"?

Or are both of these the same thing?

And is it just less bad, for now? Are we about to get an epic expansion in the new lows list and the entire market is about to completely fall apart, again? Even after the average stock in the Nasdaq is already down over 40%?

Are you expecting another collapse this Fall?

Let me know what you're thinking. I love hearing from you.

In the meantime, how do we know if the market is actually improving, instead of just being less bad?

Well, mathematically we cannot have a bull market unless more stocks start to go up.

Fewer stocks going down is one thing, but unless they start to go up in price, there's no meaningful signal.

So for me, the 3-month highs list (63 days) is an important one to watch. Notice the expansion in new 3-month highs in August. But no love ever since.

If you start to see an expansion in new highs, then we're talking about some significant changes in market trends.

Here's what that looks like currently:

Another big one for me is in the percentage of stocks above their 200-day moving average.

Is the 200-day perfect? No.

Is anything perfect though?

The point of this particular smoothing mechanism, for me anyway, is that if a stock is above its 200-day, then it's probably not in a downtrend. If a stock is below its 200-day, then it's probably not in an uptrend.

And that's good enough for what we use it for.

So this chart is essentially the percentage of stocks on the NYSE that are in uptrends.

And if it's below 20%, then this is not a healthy market.


We're looking for readings above 20% and holding above there, as historically significant.

Below 20% of stocks above their 200-day on the NYSE, and a lack of new 3-month highs, means we need to continue to be very selective on any long positions.

If we start to check off these 2 boxes (% > 200 day & expansion in new 3-month highs), then we can talk about having more broad exposure to equities and a less selective approach.

We're going to go over all of this, as well as some other important market gauges, this Tuesday night on our Live Mid-Month Conference Call. We get going @ 6PM ET October18th.

We will also be discussing individual stocks and ETFs that really stand out in this tape that we MUST OWN going into the end of the year.

ASC Premium Members can register here, if you haven't already.

Make sure to ping me with any additional topics you want me to make sure to cover.

See you there!

- JC

 

Filed Under: