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.
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:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Over the past few weeks we’ve seen a handful of major indexes, like small and mid-caps, resolve higher and kick off a fresh up leg. But breadth has really cooled off since then, as participation has been declining despite the major averages rallying.
This week, we’re finally seeing that weakness show up at the index level -- particularly from SMIDs and cyclicals.
When we were reviewing our breadth charts, we noticed the deterioration in energy sector internals has been particularly bad. Not only is breadth not confirming the new highs from energy stocks… but there are actually some pretty ugly divergences in our new high indicators.
Energy stocks are currently vulnerable, sitting just above their breakout level at former resistance. Considering the lack of support from internals, this group is on failed breakout watch.
Let’s take a look under the hood and discuss what we’re seeing.
Energy has been coiling in a continuation pattern above its year-to-date highs around 56 for over a month now. You can see this in the upper pane of this chart:
Despite the new highs from almost all the large-cap major averages, we had yet to see new highs in their corresponding advance-decline lines.
We also hadn’t experienced the kind of expansion in participation that we’d expect to accompany the indexes to new price highs.
Our new high indicators were still muted, even on shorter timeframes.
But that was last week. This week, mid-caps and small-caps have joined their large-cap peers at new record highs after making decisive upside resolutions from their year-to-date ranges.
And guess what? We’re finally getting that breadth confirmation we were missing.
Let’s talk about it.
First, here’s a quick update on the advance-decline lines that we covered in last week's column:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
While breadth has improved in recent weeks and months, the bulls still have their work cut out for them.
When we consider all our breadth indicators in aggregate, the evidence remains mixed. What else is new!? It’s been that way for the majority of this year.
Many of the major indexes made new all-time highs this week. Meanwhile, some advance-decline lines are moving higher, but others are moving lower. Some are at the top of their range, but others are at the bottom of theirs.
The advance-decline line measures stock market breadth based on cumulative net advances. In other words, it takes the number of advancing stocks on a given day and subtracts the number of declining stocks. That number is then added to the previous day’s value, creating a cumulative advance-decline line.
A/D line divergences occur when price is making new highs and the A/D line is NOT.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
September saw significant selling pressure in equity markets. The S&P 500 suffered its worst drawdown since last year, and many of the major indexes made a lower low. But when we look under the surface, it really wasn’t that bad.
We didn’t get an expansion in new lows to confirm the new lows in price. Instead, these readings remained muted across most of the major averages in the US.
Since then, the bulls have regained control. Breadth has improved throughout October as the indexes have rallied back toward their former highs. Although we haven’t seen a real expansion in participation at the index level, things have definitely been moving in the right direction.
Let's talk about it.
Here’s a look down the cap scale at new 52-week highs for all three S&P indexes, from large to small:
