Breadth Of Momentum Remains Weak
First off, there are a million ways to measure momentum and two primary kinds: time-series (absolute) or cross-sectional (relative) momentum.
Time-Series momentum measures an asset's performance against its own past performance, exhibiting the tendency for assets that have been trending in one direction to continue in that direction. Cross-sectional momentum is measured by comparing one asset's performance against another and relates to the tendency for assets that have had the strongest (or weakest) relative performance to continue those trends.
For the purposes of this study, we're looking at time-series momentum as measured by the 14-Day Relative Strength Index (RSI). And the way we're looking at it is using the percentage of stocks in the Nifty 500 showing positive momentum characteristics.
On the downside, we've seen the number of stocks hitting oversold conditions diminish, but now we need to see participation to the upside expand to show us that this is more than a dead-cat bounce.
The reason we look at the number of stocks getting overbought as a confirming (or leading) indicator for price action is because we know that strong stocks get overbought (RSI > 70) and weak stocks get oversold (RSI < 30). So during uptrends, we see stocks consistently getting into and staying in overbought territory, confirming that buyers are in control and are maintaining their aggressiveness even as prices move higher.
Click on chart to enlarge view.
So what exactly are we looking for here? As you can see by the green arrows, ahead of previous uptrending periods in the market, we've seen this number spike to new highs. We call this a "breadth thrust", and while that initial signal is important, what happens afterwards is just as relevant.
After we see that initial move we want this number of stocks hitting overbought conditions to stay elevated. Notice how after initial breadth thrusts in the past we saw peaks and valleys in this indicator, but it did not get and stay at the lower bound for long periods of time like we see in downtrends. In other words, we want to see continued participation to the upside from as many stocks as possible.
Rotation is the life-blood of any market move. We can't expect the same stocks to get and stay overbought forever, that's unrealistic and unsustainable. Instead, we want to see broad participation so that when a leading sector takes a pause and temporarily falls out of overbought territory, money rotates into another area of the market and pushes it into overbought territory...and so on and so forth.
That rotation is exactly what allows this indicator to stay elevated throughout periods where the Nifty 500 is in an uptrend.
Right now only 5 stocks in the Nifty 500 have an RSI value above 70: Cadila Healthcare, Cipla Ltd., Dr. Reddy's Labs, Lupin Ltd., and Torrent Pharma...all part of the Pharma sector which we've liked since November. The fact that this number is so low even after a 20% rally in the Nifty 500 shows just how strong participation to the downside has been.
Additionally, the Nifty 500 closed at its highest level since March 17th this week...but roughly 61% of stocks are lower from that date with the median return for all of its components being -3.78%
These stats suggest that overall stock market breadth remains weak and that the average stock is still struggling over any sort of intermediate or long-term timeframe.
The Nifty 500 stabilizing above its 2015 highs would be a big step in the right direction, but until we start to see improving price and momentum characteristics in more stocks, it's going to be difficult for the major indices to make sustainable moves higher.
Keep an eye on this chart and let us know if you have any questions!
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Allstarcharts Team