Key Points
- Transports are Moving in The Wrong Direction
- Breadth Divergences are Too Small to Care
- NYSE Lows are Not Flashing a Warning
Chart in Focus:
Along with breadth, Transports are one of the most important leading indicators. It’s important that Transports lead the market higher and confirm new market highs, which it did throughout most of 2021. After making a new high on May 7th, that was confirmed by the S&P 500, the wheels (pun intended) started to come off.
Since making a new high, Transports have begun to diverge from the overall market. While small divergences don’t matter, this is starting to become large enough to catch our attention.
NYSE Breadth
The NYSE Advance Decline Line has been leading this market higher for the last couple of months. On July 1, 2021, it made a new all-time high that was confirmed by the S&P 500. On a very short-term basis the NYSE AD Line is starting to diverge; however, small divergences simply don’t matter.
Critics of the A/D Line, as it applies to the New York Stock Exchange (NYSE), argue that today’s version of the index is tainted. A large part of the index is now composed of bond related closed-end funds that have a positive bias. But I don’t believe that argument is valid. Sometimes, the bond closed-end funds can prove to be a better indicator of stock market direction than the stocks themselves. You want a tool that gives you a different answer from what the “price” is saying, otherwise the entire exercise is pointless.
Another way to measure market breadth is by tracking the NYSE 52-week New Highs and Lows. In an ideal situation, when the market is making a new high, you want to see an expansion of 52w New Highs while 52w New Lows evaporate.
Currently, we are not seeing a healthy expansion of New Highs which has caught our attention. However, more important to us is the lack of New Lows. We have been on record about the fact that deeper declines simply DO NOT happen without an expansion of New Lows. It’s basic math!
S&P 500 Breadth
The percentage of issues on the S&P 500 that are trading above their respective 20, 50 and 200-day moving averages can tell a story. In the short term it’s clear that there is some underlying weakness. However, none of this will matter until it bleeds into more intermediate to long term data points.
As you can see below, the % of stocks above their 20- and 50-day moving averages both had a quick decline to start the month of June and then bounced.
However, the % of stocks above their 200-day moving average haven’t moved much for months. Until we see some weakness in the longer-term data much of this is just noise.
Russell 3000 Breadth
For those concerned about the composition of the NYSE, when it comes to breadth, we can point to the divergence in the Russell 3000 AD Line.
After leading the market higher and peaking on June 8th, 2021, the Russell 3000 AD Line has been range bound but declining. It is close to making new short-term lows while the S&P 500 continues to print all-time highs.
Once again, while the divergence is present, it’s minuscule enough to not matter much.
Take-Aways
Technicians who don’t manage money, love to point out every single divergence. However, until the divergence becomes meaningful, it’s just noise. While we are seeing some small divergences across different data points, the trend needs more time to play out. As with all divergences, they must be confirmed with a breakdown in price.