The percentage of new highs and other internal indicators spiked to historic extremes in 2020, indicating that we were in the early innings of a new bull cycle.
Sideways and choppy price behavior has been the theme this year. We haven’t come close to the high-water marks achieved by our breadth indicators last year, so, naturally, there are divergences.
Indeed, these breadth divergences are to be expected. Market internals tend to peak early in a cycle. What bulls don't want to see is a meaningful downside expansion in breadth.
During the recent selling pressure, we experienced some of the highest readings in new lows since the COVID crash.
So the question we’re asking now is simply “was that it?” Are the bears getting ready to take control? Was this a bearish initiation thrust or a “fall day,” as our friend Mike Hurley likes to call it?
The answer is "we don’t know yet."
Let’s talk about why that is.
Here are the net new highs for the New York Stock Exchange (NYSE) looking back at the last few cycles:
As you can see, the recent flare-up in new lows represents a clear change in character when compared with the past 18 months.
This is by far the most significant amount of new lows since Q1 2020. It’s also worth noting that the current reading looks a lot like the “fall days” from 2014 and 2018. In other words, it’s time to sit up and take notice.
While this is definitely a red flag, it doesn’t mean we want to sell everything and prepare for a crash. In fact, we’re not even convinced that this was the bearish initiation thrust we’re looking for. We can only know for sure with hindsight.
One thing we do know is that we need to be on the lookout for further weakness. It's time to turn to our massive arsenal of breadth data and other tools to help us make sense of the current environment.
The reason we're questioning whether this was a bearish thrust is that the evidence is mixed when we look at new lows across different exchanges and indexes. A bearish initiation event for internals is often measured as the most downside expansion in an 18 month period.
While this just happened in the NYSE and Nasdaq short-term new lows, the readings for small and mid-caps didn’t even top the weakness we saw this summer.
Here’s a look:
So, when we look at SMIDs, there’s really nothing to see from the 63-day new lows. On the other hand, here’s what new lows look like on the NYSE and Nasdaq exchanges:
As you can see, we’re getting mixed signals from our breadth indicators. We'd like to see more conclusive evidence before we declare this a bearish initiation thrust. The fact that we’re not seeing the highest amount of new lows across all indexes and exchanges doesn’t make us confident this is indeed the “fall day” we’re looking for.
There's also been a bullish development from breadth on a tactical basis during the snap-back rally from stocks this week. Here’s a look at NYSE Advancing Volume, which just posted back-to-back 80% days:
Lowry Research did a study into 90% upside days and found that back-to-back 80% days are very similar to a 90% up day. These volume thrusts are typically a bullish signal for the broader market and suggest higher prices over the coming 12-month period.
If you want to read more, you can find the study here.
To recap, we simply don’t know if this is the beginning of the end of the current bull cycle. The evidence from internals is not clear, and to us this suggests it probably is not.
Whether this was a “fall day” or not is only something we’ll know with hindsight. What we do know is that it's time to sit up and pay much closer attention to breadth in the future. If the market is really cracking, there will be more signs to confirm that, and we’ll have time to position accordingly.
We want to continue to give the bulls the benefit of the doubt for now.
We’ll be keeping a close eye on internals moving forward to gauge the market’s overall health, and we’ll be right here talking about it as soon as anything important changes.
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...
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