Market Breadth Just Flashed a Warning Sign

Market Warning Sign

Many investors rely on indicators to help them understand the market action.

Some indicators measure momentum. They help time buy and sell signals in individual stocks. Other indicators provide a broad view of the stock market.

Breadth indicators measure how many stocks are participating in a price move. They aren’t as popular as momentum indicators, but they are more useful.

An example of a breadth indicator is the percentage of stocks trading above their 200-day moving average (MA). This shows whether more stocks are in an uptrend or a downtrend.

Breadth measures the trend for a group of stocks, like the ones in the S&P 500 Index. The chart below shows that indicator.

Market Warning Sign

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By definition, a stock is in an uptrend when it’s above its 200-day MA. A stock is in a downtrend when it is below its 200-day MA.

In the past, when the percentage of stocks in the S&P 500 that are above their 200-day MA fell below 65%, the stock market has been in trouble.

Well, that’s where we are now. Barely more than half of the stocks are above their 200-day MA.

This Is a Warning Sign

Over the past 10 years, being out of the market when this indicator is below 65 avoided steep losses.

The maximum decline for the S&P 500 while the indicator was above 65 was 14.2%. When the indicator was below 65, the largest loss in the index topped 55%.

This doesn’t mean you should sell all of your stocks and sit in cash. There will be winners in any market. But in a bear market, expect less than 20% of stocks to be winners.

With breadth bearish, now is not the time to buy stocks without careful research.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader