Breadth is Bad,
but There May Be a Silver Lining

by | Dec 2, 2021

Key Points

  • Technology Hardware & Equipment Is a Port in the Storm
  • NYSE Breadth Breaks Down, New Lows Rise
  • S&P 500 Is Being Held Up by a Handful of Stocks
  • Small Cap Metrics Are Abysmal
  • Silver Lining: Short & Intermediate Metrics Are at Levels that Have Seen Markets Bounce

Chart in Focus

When equities are under pressure, it is easy to pile on and join the chorus of negative commentary. However, it is often more constructive to look for pockets of the market that are bucking the trend, as these are often groups that continue to lead when the market turns. The S&P 500 Technology Hardware & Equipment Index traded to new 63 and 126-day absolute and relative highs yesterday. Both the absolute and relative trends have broken above resistance and are above rising 50-day moving averages.

NYSE Breadth

The NYSE’s Advance/Decline Line remains under pressure as we all know that breadth has been deteriorating for the past few weeks. The indicator has moved below the 50-day moving average and the lows from July and September. At the same time, the index has traded down to key price-based support and its 50-day moving average. The bulls want to see a quick recovery.

The NYSE’s Advance-Declining Volume Line has sustained more damage than the Advance/Decline Line after not reaching record highs with price in November. The indicator has fallen through support below the 50-day moving average.

The 5-day moving averages of issues on the NYSE making new 52-week and six-month lows have continued to increase. This is one of the key breadth indicators that we track to inform our views on the equity market. With the S&P 500 sitting on support, we want to see these metrics begin to recede. A further build from current levels will increase the odds that support will break for the index.

The five-day moving averages of stocks on the NYSE making new six-month and 52-week highs have declined over the past two weeks. This is to be expected with the equity market under pressure, and we want to see these metrics reverse higher if the S&P 500 holds support.

The percentage of stocks on the NYSE trading above their respective 200-day moving averages moved to 29% this week from 49% two weeks ago. The indicator is now at its lowest level of the year and has been in decline for much of 2021. Despite this weakness, the S&P 500 has remained above its 200-day moving average. The long-term trend remains bullish, but it is being supported by an ever-decreasing number of stocks.

After failing to build on strength in October and November, the percentage of issues on the NYSE trading above their 50-day moving averages has moved to its lowest levels of 2021. The metric declined to 25% from 55% two weeks ago. This indicator is now testing lows that have coincided with near-term bottoms for the S&P 500 since the COVID lows.

The short-term metric is where we see the greatest impact, as the percentage of stocks trading above their respective 20-day moving averages fell to 12% from 47% two weeks ago. Here too, the indictor is at levels that have tended to mark short-term bottoms for the S&P 500, which is trading below its 20-day moving average.

S&P 500 Breadth

Breadth metrics for the S&P 500 fell sharply over the past two weeks:

  • Advance/Decline Line: Trading below the rising 50-day moving average.
  • Percent Above Their 200-Day Moving Average: 51% from 71% two weeks ago.
  • Percent Above Their 50-Day Moving Average: 28% from 68% two weeks ago.
  • Percent Above Their 20-Day Moving Average: 8%% from 57% two weeks ago.

SmallCap Breadth

Breadth metrics for the S&P 600 Small Cap Index also moved much lower over the past two weeks:

  • Advance/Decline Line: Loses the 50-day moving average.
  • Percent Above Their 200-Day Moving Average: 37% from 59% two weeks ago.
  • Percent Above Their 50-Day Moving Average: 24% from 69% two weeks ago.
  • Percent Above Their 20-Day Moving Average: 5% from 57% two weeks ago.

Take-Aways:

There is no way to sugarcoat how bad the breadth picture has become across U.S. markets. Many metrics are at or near the lowest levels of the year. For a silver lining, we could make the case that some of the short and intermediate-term metrics are now at levels that have marked turning points over the past year. With the S&P 500 sitting on support, with only a handful of stocks holding the index up, it is imperative that breadth metrics begin to improve. Failure to do so would increase the odds that support will break, and the index will reverse its bullish trend.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.