Baseline Analytics TrendFlex Score includes several market indicators focused on internal market strength. These breadth indicators exhibited rather lofty jolts on Friday 3/20, hitting extremes that not only reinforce the strength of equities, but that potentially point to some frothiness in the "risk-on" trade. The charts below depicts several measure of market breadth (all of which are variably-weighted components in the TrendFlex Score).
The chart above is the NYSE Advance-Decline indicator. Note the strong uptrend maintained above its moving average, pushing to meet up with its high from the beginning of March. No internal weakness here. As I was seeking published commentary on the NYSE Advance-Decline, I found a rather noteworthy analysis from Greg Schnell, particularly interesting for its chart of the 6-year cycle of the S&P 500. That cycle, which plots a market low in the mid-2015 timeframe, was drawn back in December 2013, and markets have admittedly behaved a bit more bullishly since. Also note Greg's reference to the "80/90's period where we stay nice and strong." Something to keep in mind today.
The next chart is the High-Low Percent of the S&P 500. This breadth indicator measures the percent of new highs of the S&P 500. It is based on a percent of net new highs (number of new highs minus number of new lows) divided by the total number (500) of stocks in the S&P 500. In all of these charts we plot the 63-day exponential moving average, essentially a three month average of the indicator. The $SPXHLP (which is a 5-day average to smooth out the variability), is reaching toward 12% (its recent high was at 14% prior to the market heights reached at the start of March). A bearish reading of this breadth indicator is below 0 (a number of market technicians view -2 and lower as a truly cautious level for bulls).
Our final breadth chart is the NYSE Advance-Decline Volume line. This breadth indicator is based on Net Advancing Volume, which is the volume of advancing stocks less the volume of declining stocks. So higher-volume stocks (i.e. Walmart) have a heavier weighting in this calculation, which basically favors the large-cap stocks (the Advance-Decline line in the first chart above favors small to mid-cap stocks). Click here for a primer on AD and AD Volume indicators by Arthur Hill.
We look to market breadth for signals that the uptrend is losing steam. As fewer stocks participate in a market rally, breadth will begin to flatten and decline. Note the chart presented by Greg Morris below. The Nasdaq Composite reached a new high in November 2007, while breadth peaked in March 2007.
Looking at today's chart of the Nasdaq and its A-D Line (below), it appears that 2015 is moving in the right direction, but the trend in the A-D line prior to February 2015 is a bit non-committal.
We'll watch this one carefully to assess any continued divergence, as these market breadth indicators remain invaluable to gauging the internal strength of equities.
Our TrendFlex Score includes four measures of market breadth. Subscribers receive an update on the TrendFlex Score each week, as it measures the risk of a change in the market trend.