It's now a year later, and we're still seeing them... In fact, the S&P 500 recently registered its highest percentage of new 52-week highs in history - absolutely crushing the historic reading we saw in Q4 of last year.
So, why is this important?
These extreme readings are as bullish as it gets and are a very common characteristic of the early innings of a fresh bull market. It's as simple as that, right?
Well, yes... But, not exactly...
While these extreme readings in our breadth indicators are undeniably bullish looking out over any period of more than a few weeks/months, over the very near-term these same bullish developments are actually cautionary signals and are often evidence of exhaustion and tend to be followed with some corrective action.
But what happens when our original November 2020 breadth thrust of 28% is eclipsed by an extra 16% about 6 months later?
Such extreme surges are incredibly rare... Let's have a deeper look at what this could mean for investors over both long and short timeframes.
Here's a look at the most recent breadth thrust, which was the highest reading this indicator has seen looking back almost three decades:
Notice how it totally dwarves the extreme reading from November of last year?
So the question we're asking ourselves is this:
Did we overreact on the first breadth thrust? Maybe that wasn't the signal, and we are just now entering the early stages of a new cyclical bull market environment? Or was that initial surge in new highs the bullish initiation we thought it was and this is yet further confirmation and another initiation-like signal...
Or...could this be a sign of exhaustion and we're actually in the later stages of the current bull market rally.
Well, for the latter scenario to hold any water, we'd need to start seeing some deterioration in breadth which would need to come in the form of an expansion in new lows.
Guess what, we're just not seeing it. AT ALL. The number of new lows, even among very short timeframes like 21 and 63-days, are still slim to none. Until that changes, these bullish thrusts shouldn't be interpreted as anything else but exactly that. BULLISH and indicative of higher prices looking out over the long-run.
BUT over the shorter term, these types of breadth thrusts are often followed by periods of digestion or corrective action, which is exactly what has occurred in the weeks since this most recent thrust. Just think of the sideways mess that so many risk assets have turned into of late despite being in strong structural uptrends. Many of them are currently enduring some damage on a tactical basis as they churn and chop sideways in holding patterns. But, the primary trend remains UP in almost all of these markets, especially as it relates to equities.
When we zoom out on the S&P 500 we get a clearer picture of just how extreme the May 2021 breadth thrust was:
We haven't seen this type of thrust in over 25 years. The closest thrust of this magnitude was back in May 2013, when the 52-week high list hit 40% and the S&P had just broken back above and reclaimed its pre-financial crisis highs.
Following this reading, the market experienced an incredible 5-year period of gains right up until global risk peaked in 2018.
While there’s never any real way to know just what's in store for the market over the longer term, there is a lot of information in these breadth thrusts which can help us identify the most likely directional bias for the market over the foreseeable future.
In terms of how we should react to these extreme readings when we get them, it always it comes down to knowing your own timeframe and objectives as a market participant.
For us, our outlook remains unchanged, but it does vary among timeframes.
Over the long-term, things look great and we anticipate this rally keeps cranking higher in due time. There has been minimal-to-no damage to the primary trends when looking at both international and domestic stock market indexes, as well as most major risk assets, in general.
Meanwhile, over the shorter term, things are messy,and we think they remain messy for the foreseeable future. And this is exactly what we should expect following such a blowout reading in internals last month.
Bottom line: The longer-term weight of the evidence remains with the bulls but we need to be nimble over the near term... And most importantly, we all need to take a step back and remember what our timeframes are every now and then, as this will dictate how we should be positioned.
