Stock Market Breadth Continues to Wane and Warn

Although the headlines don’t necessarily reflect it, the U.S. stock market is having a very tough time continuing to make new all-time highs as all the major benchmarks remain flat to negative for the first three months of 2014.

The first chart below shows the year to date performance of the Dow, Nasdaq, S&P 500, Russell 2000, and Europe ETFs with the Dow leading the downside.

What is going on and why is 2014 different than 2013?

Market Internals

A superficial glance at the indices themselves is not enough to tell us what is really going on in the markets.

That is why in our Technical Forecast we dive deeper into the market’s internals to give investors an edge in what’s really driving the markets and why it matters.

For instance the chart below was published on 2/23 when the market was making yet another new all time high with the commentary, “Obviously the rally of the past few months is not like any of the previous rallies since the 2009 market bottom.  All of those rallies had quick participation of over 85% of companies with prices above their 200 day moving averages.  This time around, the % of NYSE stocks above their 200 day moving averages has not been above 75% since May 2013 and is moving sideways instead of up.”

Through today, that chart has not changed much. Stocks are respecting the triangle resistance and turning back down as the trend of fewer and fewer stocks participating in the rallies continues.

Less than 75% of stocks are above their 200 day moving averages, much different than the previous rallies where participation approached 90%.

Listen: My radio interview on about market sentiment, VIX and our 66% gold bonanza 

Leaders Become Laggards

Breadth charts, like the one above, are important because they show that markets continue to be driven higher by fewer and fewer stocks, which is a typical occurrence at major market tops.

Even popular leadership stocks such as the BioTech Sector (NYSEARCA:BBH), Google (NASDAQGS:GOOG), Tesla (NASDAQGS:TSLA), and Netflix (NASDAQGS:NFLX) have also started to decline. And when leaders start to become laggards, it is a sign the market may be rolling over.

Since their recent tops one month ago, Tesla has fallen over 25%, Netflix has fallen over 16%, Google over 10%, and the Biotech sector (NYSEARCA:BIS) over 10%.  These are very big moves for such a quick timeframe and in an environment where the overall markets are still sitting near their all time highs.

Former leaders (NYSEARCA:IBB) continue to become laggards (NYSEARCA:DOD) and the chart above displaying the % of stocks above their 200 day moving averages shows this deterioration has been in the making since May 2013.

Eventually, there will not be enough stocks moving higher to support the overall indices, taking the markets lower as over 25% of companies are now in bear trends, with prices trading below their 200 day moving averages.

The ETF Profit Strategy Newsletter uses technical, fundamental, and sentiment analysis to stay ahead of the major trends in all the equity classes.  Since May 2013, market breadth has been declining as fewer and fewer stocks participate in the rally. Alert investors should pay attention to these market internals and prepare their investment portfolios accordingly.