Chart of the Day: More Breadth Improvement

January 31, 2023

It's a market of stocks.

People forget that.

They choose to obsess over every tick in the S&P500 or Nasdaq instead of recognizing what's happening among the actual components of those indexes.

As it turns out, this has become one of our competitive advantages.

If you're wondering why we tend to be ahead of the curve on changes in major trends, I would point to this.

Most people don't have the time (or are too lazy) to sit there and count how many stocks are going up vs how many are going down.

Even my colleagues who do this professionally would rather lean on their computers as a crutch instead of just doing the work.

It's funny to watch. Or sad. Not sure which.

But either way, as investors, we want to remember always that although we talk about the "Stock Market", it really is just a "Market of Stocks".

With that knowledge comes power.

So either do the work and go through all the charts yourself, or find someone who does and read their notes.

In my experience, it's not that we don't want to use the computers. It's not that we don't want to use the algos.

All of that stuff is great, and we use these tools all day every day.

I think my bigger point here is that we want to use both!

It's not 'just' the humans. It's not 'just' the robots.

The key is to do both and combine the results.

From a manual analysis perspective, it's been quite obvious to anyone who put in the time that we've been seeing consistent breadth improvement since the 2nd quarter last year. And things really started to improve in Q3 and into early Q4.

So the historic strength we've seen in stocks in recent months should come as no surprise to anyone paying attention.

Breadth was already improving. It had been for a while.

So the question is, are we still seeing breadth improvement? Or are we starting to see breadth deterioration?

Here is the % of stocks above their 40-week moving average hitting the highest levels in a year:

Divergences in these readings tend to precede corrections and changes in trend, even if only temporary.

To be sure, we have not seen this yet.

Instead, what we've seen is positive sector rotation. The Growth stocks came out on fire right out of the gate this year, a far cry from what we saw in 2022.

What's interesting is that we're seeing tremendous breadth improvement in Crypto too.

Look at the insane spike in Coins above their 200 day moving average, again the most in over a year:

These are all the Alts listed in Binance - over 300 names, for those who are wondering.

It's not perfect (nothing is), but it's a pretty good look at the internals of crypto.

Just like the S&P500 isn't the best gauge (nothing is), but it gives us a pretty good idea of what the overall market is doing, considering they're the 500 or so most important stocks.

The Catalyst For A Correction

So what's it going to take for stocks to correct?

Just like the catalyst for a stock market rally in Q4 was Dollar weakness, I think a bounce in the Dollar is likely to put pressure on stocks and other risk assets.

Here's what the Dollar Index looks like now:

This is about the 50% retracement of the entire move off the lows in 2021, and it was also support last Spring.

If the Dollar was going to bounce, this would be a logical place for us to see some demand come in.

But just like we look at the internals of the stock market, instead of obsessing over the indexes, and the same for Crypto, I think we should treat the Dollar the same way.

I'm focused on the major crosses against the US Dollar - so Euro, Yen, GBP, CAD, Aussie, EM currencies etc.

It's a weight of the evididence thing for me. If you're new here you'll come to learn that real quick.

There's no one index or one "indicator" that tells us everything we need to know.

That's why we put in the work.

And that's how I currently see things.

What about you?

What are you seeing?

Chime in here

Let us know what you're thinking. We love to hear from you!

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