Market Breadth is Blowing Warning Signs

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After today’s selloff, the Dow and S&P are still less than 2% from making new all time price highs, but breadth indicators suggest the market may be rolling over here.

The number of stocks that are participating in the rising uptrend continues to wane as breadth indicators show the markets are rising on shakier and shakier underlying technicals and with less and less underlying support.

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At the current rate, the markets eventually won’t have any firms left to lead the indices to new highs; the inevitable result of course will then be a decline.

Breadth of Fresh Reality

On Monday, 5/13, the S&P made a new all time high at $1902.  The Dow similarly hit $16,736, also a new all time high.

But of the S&P’s 500 stocks, only 58 of them (12%) also participated with new 52 week highs that day.  The Dow had a similar story with only four of its 30 (13%) stocks making 52 week highs, even though it also made a new all time price high.

The chart below, provided to our subscribers at ETFguide.com, shows how much breadth has deteriorated over the past year and puts this declining breadth reality into perspective.

Only 58 of the 500 S&P companies made new highs along with the market this week.  This is a stark contrast to the strong bull moves in 2012 and 2013, when as many as 200 companies were participating and driving the market to new highs.  This is also a reason the markets have had a much harder time following through on the upside even once new highs have been obtained.

Today, the chart shows there are still fewer soldiers following their generals into battle.

Dow’s Lack of Leadership

The Dow (DJI:^DJI) is in a similar boat with an apparent lack of leadership as only Caterpillar (NYSE:CAT), Chevron (NYSE:CVX), 3M (NYSE:MMM), and Travelers (NYSE:TRV) made new 52 week highs along with the Dow this week.

These four stocks also happen to be a few of the greatest weighted companies in the Dow, with their prices over $100 each.  This means they affect the Dow’s price more positively than others, skewing the Dow’s performance higher.  (For more on how the Dow’s weightings affect its performance see my previous article on why the Dow was having trouble making new highs)

In a similar chart to the one provided above, the Dow had a much higher 13 companies make new 52 week highs at its May 2013 peak.  Now, only four companies are exceeding their previous peaks.

Other Breadth Warnings

New 52 week highs aren’t the only breadth warnings either.

(Check out one of our latest videos on some other breadth tools we use)

The % of NYSE companies below their respective 200 day moving averages is now up to 28%.  This ratio peaked at under 15% in early 2013 and hit as low as 10% in late 2009.  The number of NYSE stocks actually above their 200 day moving averages has been declining steadily since, also showing a divergence with the markets’ new all time highs.

Last week’s selloff in the Russell 2000 (NYSEARCA:IWM) also took over 50% of its constituents into bear market territory.  Over 1000 of the Russell 2000 stocks are now down 20% or more from their peaks while the Russell itself is down just 10%.  That does not seem like a healthy development.

Breadth warnings abound, but so far the broader market (NYSEARCA:VTI) has been able to overcome them.  This of course won’t be able to last forever.

Either more companies will need to start participating in the bull market, or the markets will eventually fall as the generals have no more soldiers left to hold the line.

ETFguide utilizes technical, fundamental, and sentiment analysis to stay ahead of the markets.  Breadth has been deteriorating since May 2013, yet the indices have been able to grind to new highs.  If breadth continues to wane, eventually the market’s advance will be stopped in its tracks.