From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
We’ve been super obnoxious about the deterioration in new highs we continue to see in the US.
But the major averages haven't been phased a bit. The S&P 500 and other large-cap indexes keep charging to new heights.
Yet when we look beneath the surface, we're hearing a different story… The vast majority of stocks have NOT been making new highs along with the averages. In fact, we’re beginning to see an expansion in new lows.
This is a new development that's commanding our attention right now, mainly because these are the weakest conditions we’ve seen many of our breadth measures since last year.
At the same time (and just like JC mentioned in his note from yesterday) we’ve already seen a stealth correction for the better part of this year!
Most stocks are simply NOT making new highs, and haven’t done so since Q1. Plenty more are trending sideways and have already been consolidating for months.
Perhaps we’ve already seen the market correct beneath the surface. Maybe that was it...
The major averages are simply not a good representation of what US stocks have been doing for the past 6 months. So why do weak internals have to result in any significant downside for these indexes? We’re not holding our breath...
Plus, we’re seeing the very same thing when we look at stocks outside of the US. Internals have also remained weak internationally for the better part of this year.
In this post, we'll look at the current state of market breadth globally and focus on shorter time frames to illustrate the accelerating deterioration.
A recurring market breadth theme right now is that new highs have completely dried up, even on a 21-day and 63-day basis.
And this isn’t just the case for the US, but also internationally. Here’s a look:
As you can see, fewer and fewer global markets are making new short-term highs despite the new all-time highs in the All Country World Index $ACWI.
No different from the major averages in the US, this cap-weighted index is being propped up by the usual mega-cap culprits.
But global internals have been a mess for months. This is nothing new!
The bottom line is some countries are going up, but most are not. Just like some stocks are going up, but most are not.
Now here's a look at the 21-day & 63-day lows:
Not only are we seeing new highs evaporate, but more and more global markets have been falling. This is illustrated well by the recent ramp up in new lows, shown above.
We haven’t seen this many new lows pour over into our 63-day indicator since fall of last year.
This is not the sort of action bulls want to see when a market is moving higher. The strongest rallies are fueled by robust participation and healthy rotation across the board. That’s not what’s happening today.
Instead, we’re seeing exactly the type of breadth we’d expect in a choppy environment, with readings continuing to diverge and not confirm the new highs for the broader market.
When we look at our international universe, the median country is down 5.95% from its highs.
The median drawdown for developed markets is 4.11%. Emerging markets have been much weaker, with the median country 10.54% off its highs.
It's clear the stealth correction we are seeing in the US is also occurring abroad.
More and more countries are also experiencing damage to their intermediate-term trends. Here’s a look at the percentage of global markets above their 50-day moving average:
This indicator has really weakened over the past month or so, and is currently sitting at just 30% (34% for Developed Markets & 25% for Emerging Markets).
Throughout history, readings below this level have been consistent with periods of elevated downside volatility.
So what do we know?
We know the level of participation on the global stage is lacking. There isn’t much support beneath the surface and these new highs aren’t likely sustainable if this persists and/or worsens in the coming weeks.
Emerging markets remain the weakest area, while pockets of developed markets -- especially the US -- are trying their best to drag the rest of the world higher with them.
What we don’t know is just how much we’re going to see this weakness in market internals reflected by the major averages. As we just mentioned, these new highs are not likely sustainable with the current breadth picture. But as we also said at the beginning of this note, the market has already been correcting for months.
So maybe that was it. Maybe internals bottom out and turn higher from here.
Or, maybe conditions worsen further and result in some more significant downside for stocks in the US and abroad.
We simply don’t know. We can only monitor the new data as it comes in each day. And that’s just what we’ll be doing.
We’ll be keeping an extra close eye on our internal indicators moving forward to gauge which is to be the most likely outcome for the overall market.
And we’ll continue to let you know what we find!
Let us know what you think and feel free to reach out with any questions!
Premium Members, be sure to check out this week’s Breadth Report below...
