From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Breakouts and breadth expansion kicked off the month of November.
But the market had other ideas...
Instead of fresh legs higher, investors were dealt a handful of downside reversals and failed moves. Last week, we went from discussing breakouts and new highs for stocks... to throwbacks and retests of old ranges. This all happened in the matter of a few trading sessions.
A lot has changed in a short period. In times like these, it’s important to take a good look under the hood to see what market internals are suggesting.
As we reviewed our breadth chartbook today, we asked ourselves the following questions:
Are we seeing a notable expansion in new lows? Is it enough that we should be worried?
Let’s take a look beneath the surface and see if we can find some answers!
First, let’s check in on the 21-day and 63-day lows for the S&P 500:
Notice how both of these readings have expanded as the index retreats from its recent highs. In fact, these are the most new lows we’ve seen on both timeframes, since the 2020 COVID crash.
To be clear, this is definitely a red flag. An expansion in new lows tells us there is more weakness beneath the surface than there was during the last selloff. Since early this summer, the percentage of stocks making new lows has been decreasing with each higher low the market has made.
This is what we’d expect to see in a strong uptrend. But that streak just ended, as new lows are now flashing a bearish divergence from price. As the S&P tries to carve out a higher low, we’re seeing more stocks make new lows than we did at the October low.
Let’s move down the cap-scale to the S&P 400 and see how mid-caps are making out:
It’s a similar story with new 21-day lows spiking to levels not seen since Q1 of 2020. Roughly two-thirds of the index is making new monthly lows right now. For contrast, this number was closer to 40% at the lows from a few months ago.
We still haven’t seen a comparable spike in new 63-day lows as these readings are below their peaks from July. A few more days of selling pressure could easily change this so bulls need to find their footing fast. If not, we could be looking at considerable damage.
Now, let’s take a look at what the small-caps are up to:
There is a similar expansion in new lows for small-caps, with over half of the index hitting their lowest level in about a month. With that said, we still haven’t breached the levels seen this summer. This is somewhat encouraging.
The bottom line is that while this is not the sort of action bulls want to see, it is also not the end of the world.
There's definitely weakness under the surface, and the failed breakouts from the small- and mid-cap indexes are being supported by an expansion in our new low indicators.
This brings us back to our questions…
Yes, we are seeing an expansion in new lows, as markets just registered some of the highest readings we’ve had in an extended period of time.
We want to sit up and take notice of these moves and monitor new lows across longer time frames to see if similar spikes show up. What we don't want to do is panic.
This is definitely something to be aware of and watch closely moving forward. If the selling pressure continues, we’re likely to see similar readings from our three-month (63-day) and six-month new lows.
If and when this happens, it will be time to play more defense and prepare for deeper corrective action. But it hasn't happened yet.
While we are seeing the highest readings since Q1 of 2020, we have to remember that these are merely one-month lows we are talking about. If we're going to call this primary uptrend for stocks into question, we're going to need to see more stocks make new lows across more significant timeframes.
If we see this weakness permeate our intermediate and long-term new low indicators, it will be cause for greater concern. But, until that happens, we want to give the bulls the benefit of the doubt and a chance to repair some of the recent damage.
Do you agree? Let us know what you think, and please reach out if you have any questions!
Premium Members, be sure to check out this week’s Breadth Report below...
