From the desk of Steve Strazza @sstrazza and Grant Hawkridge @granthawkridge
Whether more stocks are going up or down these days simply depends on where you look. Some advance-decline lines are moving higher, but others are moving lower.
Weakness and divergences in these indicators are more often than not resolved over time, but the longer they persist the more concerning they become.
This hasn’t been an issue for most of the major averages, as the S&P 500 and other large-cap indexes keep making new highs with confirmation from their A/D lines.
Yet when we look beneath the surface, and particularly down the cap scale, we're seeing a different story. Ultimately, some stocks are going up, but most are not.
You’ve probably heard already, but the current environment is an absolute mess as the weight of the evidence continues to hang in the balance. In today’s post, we’ll discuss some charts that do a great job illustrating all the mixed signals out there right now.
Advance-decline lines represent the net amount of stocks within an index that increase in price each day, on a cumulative basis. It’s simple: If more stocks go up than down, the line moves higher, and vice versa.
Here’s what that looks like for each of the S&P indexes:
When we see these indicators making new highs for most indexes, it's usually evidence of broad market strength. But that just hasn’t been the case for much of 2021.
As you can see in the chart, despite the large-cap A/D line being at fresh highs, mid-caps and small-caps are not... and haven’t been for several months.
The S&P 400 has been moving sideways since May. And this isn't just true for the A/D line, but price as well.
As for the weakest group of the lot, the S&P 600 A/D line has been in a downtrend for months, as evidenced by the lower highs and lower lows in the bottom pane.
Basically, the further down the cap scale you go, the messier it gets. This isn’t the end of the world, as large-cap outperformance is nothing new and happens during bull cycles all the time. But small-caps and mid-caps at least need to participate if the broader market is to get going again. After all, outperformance from the little guys is a characteristic of healthy risk appetite.
This is yet another one on our long list of breadth charts indicating mixed signals and a lack of strength beneath the surface. And that tells us something else, which is we could very well be in for more sideways price action and choppiness in the coming months. We think that would make a lot of sense.
So, do the divergences among these A/D lines resolve anytime soon?
And, when they do, which direction will it be in?
Do they worsen in the coming weeks and months, and large-caps catch lower? Or do they all improve?
We simply don't know. We can only monitor the new data as it comes in each day, and that’s exactly what we'll keep doing.
For now, things remain split as far as market internals are concerned, and the chart above is just one of many great examples of that.
Premium Members can find plenty more in this week's Breadth Report below...
