Let's Talk About Breadth, Because Breadth Matters
I'm watching new highs, advancers vs. decliners, and volume to look for clues of what could come next.
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Let’s talk about breadth. I heard someone on the television say breadth has not been good. I disagree. Breadth made a new high last week. The McClellan Summation Index is heading upward. That doesn’t happen if breadth is not good.
What is not good in the breadth department is the number of stocks making new highs. It continues to lag. Even last week, the number had increased, but was still far below the highs we saw late last year.
Nasdaq had over 600 new highs at the end of the year. In January, that number had dwindled to just over 200. Last week, Nasdaq saw just over 300 new highs, the best we’d seen for this rally, but still fewer than last fall. Wednesday, with Nasdaq eking out a new high, the new highs were back under 200. That’s not great breadth using this metric.
Now let’s look at the cumulative advance/decline line (breadth). That’s the blue line. You can see last week’s high. This week it’s not quite over last week’s high, but that’s nitpicking if you ask me.
Should we watch this for a negative divergence? Yes. If the S&P keeps on rocking upward and breadth can’t make a new high, that would be a negative.
With that in mind, let me make a comment on breadth this week. Monday, I said, despite the negative breadth reading, it didn’t feel as though we had much selling. And on Tuesday, the breadth was good, especially relative to the S&P being down four points. But Wednesday rolled around and breadth was almost exactly what it was on Tuesday, yet the S&P was up 37 points. It’s just one day, so I don’t want to fuss too much, but it’s worth watching.
Yet what really caught my eye on Wednesday was the volume on the NYSE. A mere 51% of it was on the upside. That is definitely not good for a day the S&P tacked on 37 points. Let’s watch that to see if it’s a one-day occurrence or if it develops into something more.
You see, we’ve got giddy sentiment and an overbought market, which calls for a pullback. But as I have noted, we don’t have breadth indicators rolling over. If that changes and we see breadth indicators rolling over, it becomes more difficult for the market. In other words, more than just a pullback.
And that is why breadth matters.
