Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Stock Market’s Breadth is Weak: Stocks Will Crash! Just Kidding

Stock-Markets / Stock Markets 2018 Oct 05, 2018 - 08:15 AM GMT

By: Troy_Bombardia

Stock-Markets

We’ve done 2 kinds of stock market studies recently.

  1. The U.S. stock market’s own price action.
  2. The U.S. stock market’s breadth.

Market studies related to the stock market’s own price action have mostly been bullish.

Market studies related to the stock market’s breadth have been mixed. Some are bullish, while others are very bearish.

So what gives? Why are some breadth studies so bearish? (e.g. Hindenburg Omen)


If you read the mainstream financial media’s headlines, it seems like the stock market is going to crash because “breadth is very weak”. They all sound something like this:

  1. The stock market (e.g. Dow) is going up, but most of the NYSE’s stocks are in a bear market! (Below their 200 dma).
  2. The Dow closed at an all-time high. However, 3x as many stocks on the NYSE hit 52 week lows vs 52w highs! Before, this only happened in December 1999!

Seems super bearish doesn’t it? I’ll admit, I kind of got sucked into this trap recently. But a little voice kept ringing in the back of my mind. “How is this possible? If most stocks are going down, and FANG stocks have been falling recently, who the hell is going up”? This is a purely mathematical question about how averages work.

Turns out “most stocks are going down right now” is a highly misleading statement.

I’ve reflected on a lot of market studies from 2017. Pretty much all the FAILED bearish studies were of the exact same sort: these “bearish NYSE breadth” studies.

*Breadth was flashing a super bearish sign every single month from January – December 2017. Meanwhile the stock market rallied incessantly.

So why have breadth indicators failed consistently over the past few years?

Never let the truth get in the way of a good story

Why is it that the NYSE’s breadth is so “bad” (only 55% of NYSE stocks are above their 200 dma) while 65% of the S&P 500’s stocks are above their 200 dma?

Because the NYSE no longer best reflects “the U.S. stock market”.

From Wikipedia:

The NYSE Index covers over 2000 stocks. More than 1600 are from U.S. corporations and over 360 are from foreign corporations. HOWEVER, foreign companies are very prevalent among the largest companies in the index. Of the 100 largest (by market cap), 55% are non-U.S. companies.

So straight away, you can see that the NYSE’s doesn’t accurately reflect the “U.S. stock market”. In a year like 2018 during which foreign stocks are being clobbered, it’s clear why the NYSE lags the S&P 500 so much (and why the NYSE’s breadth is so much worse than the S&P 500’s breadth).

Only 55% of NYSE stocks are above their 200 dma.

While 65% of S&P 500 stocks are above their 200 dma.

So why is it that in the past, these kinds of bearish NYSE breadth divergences marked the 2000 and 2007 tops? (more common during 1999 – 2000)

Because the world has changed

In the past (pre-2008), the NYSE mostly listed U.S. stocks. But with the advent of globalization, more and more foreign stocks are being listed on U.S. exchanges (e.g. Alibaba). This coincides with the rise of China. A lot of Chinese and foreign companies have listed their stocks on U.S. exchanges over the past 10 years (think Alibaba, Baidu, Tencent).

  1. Before the GFC, these breadth divergences in the NYSE accurately reflected breadth divergences in the “U.S. stock market”.
  2. Today, more and more “breadth divergences” in the NYSE reflect a divide between U.S. and foreign stocks. It doesn’t tell you much about breadth divergences in the U.S. stock market itself.

Year to date, foreign stocks have been slaughtered by Trump’s trade war while the U.S. stock market has gone up.

Looking at the actual data

Holy shit! Over the past few days, there were 3x more issues on the New York Stock Exchange that made 52 week lows vs. the number of issues that made 52 week highs!

These kinds of statements are very popular on financial media and fintwit, because everyone loves a good story about “how the stock market’s breadth is super weak and stocks will crash”.

But how many of these people have actually seen WHY breadth is “so weak”?

Here’s a glance at the actual data:

52 week highs

52 week lows

What do you see?

  1. The issues making 52 week highs are mostly stocks.
  2. The issues making 52 week lows are mostly bond funds and preferred.

As you can see, this isn’t exactly a “stock market breadth divergence”. This is more of a “stocks are going up while bonds are going down” divergence.

This is easy to understand. Bond prices are falling right now because interest rates are going up.

And as we’ve demonstrated in the past, rising interest rates aren’t bearish for the stock market. The stock market goes up more often than it goes down when interest rates rise.

Conclusion

So there you have it. Saying that “the stock market’s breadth is weak” because “the NYSE’s breadth is weak” is misleading. The NYSE doesn’t accurately reflect “the U.S. stock market”.

  1. Over the years, the NYSE is increasingly weighed down by foreign (non-U.S.) stocks.
  2. The NYSE has a lot of bond funds that fall when interest rates are rising.

The most accurate breadth indicator for the “U.S. stock market” = “the % of S&P 500 stocks that are above their 200 dma”. And right now, most S&P 500 stocks are above their 200 dma. Otherwise the equal-weighted version of the S&P 500 wouldn’t be rising as well. (That’s pretty much how averages work).

Lessons

Lesson #1

The first lesson is simple. Never take things at face value. Always dig a little deeper. Financial media has an incentive to sensationalize everything. After all, why let the truth get in the way of a good story, when a good story gets more eyeballs and attention? Compare these 2 headlines. Which do you think will get more clicks on CNBC?

  1. Here’s why the stock market will go up 7% next year.
  2. Here’s why the stock market will crash -30% next year.

Lesson #2

The second lesson is more technical. Going forward, I am going to post fewer of these market studies about breadth and post more market studies about the U.S. stock market’s (S&P 500’s) own price action.

Breadth indicators tend to give a LOT of false bearish signals. With so many breadth indicators out there, there will always be some that send bearish signals. I admit that I have fallen a little into this trap lately, so I am correcting myself now.

Lesson #3

For U.S. stock market breadth indicators, focus on indexes instead of exchanges. The S&P 500 includes AMERICAN companies. The NYSE and NASDAQ have a lot of foreign stocks (e.g. Baidu, Alibaba).

Times change, which means that the nature of various indicators change. The NYSE Index no longer reflects “the U.S. stock market” the way it used to.

Lesson #4

Be wary of market studies with limited data. You see this a lot:

“The stock market is doing XYZ right now. Since 1995-present, XYZ has only happened in 1999 and 2007”.

While this may have occurred in 1999 and 2007, it might have also occurred before a lot of big rallies in the 1980s and 1990s. Permabears love to use only data after 1999 because it increases the probability of a “bear market study”.

More data is always better than less.

Lesson #5

Ignore financial dogma, and examine the facts for yourself

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules