Simple Breadth Measures Reiterating Near-Term Caution

JC Parets
February 24, 2020

From the desk of Tom Bruni @BruniCharting

Bonds, Gold, and Defensive Stocks like Utilities, and Cash have been our defensive playbook for the last month.

We've made it clear over the last few weeks that we don't want to be long stocks given current conditions and think there's downside risk from a short-term perspective, despite the structural picture remaining largely unscathed.

Given last week's slight downside follow-through in US Stocks, I wanted to share two breadth charts from our Market Internals Chartbook that summarizes current conditions well.

Here's the Russell 3000 making a new marginal high with fewer of its components making 52-week highs. This is also coming within the context that even at its higher point in 2020 the number of 52-week highs was less than what we saw in 2018 and only marginally higher than 2019.

Click on chart to enlarge view.

Here's the same view except with the number of components hitting overbought conditions (Daily RSI-14 above 70). This indicator came in marginally below its 2018 highs and well below its 2019 highs. Fewer stocks getting overbought showing buyers being less aggressive and potentially losing control of this uptrend.

The Nasdaq 100 has been the strongest index out there and did see its 52-week highs reach new heights along with prices, but even here fewer stocks were able to reach overbought territory during the most recent rally.

With prices set to open below their January highs, these bearish divergences have been confirmed and offer further evidence that we want to be avoiding stocks on the long side in the near-term.

This data also shouldn't be that surprising given that more than half the stocks in the Russell 3000 (and many other indexes) are down since the index's January 16th high, as well as many markets around the globe in both ETF and local currency terms.

Does this correction have to be the end of the secular bull market? No.

Can it be? Sure, but let's take it one step at a time. Structurally US markets could correct roughly 10% and still be in a long-term uptrend with the breakouts from last year remaining intact.

For now, let's see how this price action develops and identify areas of relative strength that we can take advantage of if/when stocks get to a level where it makes sense to be long again. In the meantime, cash and a more defensive posture continue to work. 

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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