Friday, November 19, 2021

Morning Note: Seasonality Looks Good, But the Breadth!

While there's much macro in the world to touch on, we'll save it for this weekend's update and focus briefly this morning on the recent troubling trends in stock market breadth. 

Let's just say that while seasonality right here inspires legitimate near-term bullishness, the breadth readings pose a headwind to that sentiment.

Yet another case in point; this morning:

The Nasdaq Composite index is up a not small 0.57% as I type, yet its losers outnumber its gainers by ~20%, while the S&P is off slightly (-0.10%). Although the Dow is actually down 250 points (-0.70%), and, by the way, its breadth reading (only 30 stocks) makes sense, with 20 of its members in the red. However the S&P, while essentially flat, is seeing 60% of its members lower.

Granted, while not as bad as, say, yesterday's readings, 

"Breadth is very stinky, once again: While the S&P 500 Index itself is barely red this morning, literally 417 of its members are down as I type, that speaks hugely to the, I'll say dangerous concentration the cap-weighted index holds in just a handful of names! The Nasdaq Comp (barely down as well) is seeing losers outnumber advancers by 4 to 1."

today's setup nevertheless deserves our attention. 

Recall this Nasdaq Comp cumulative advance/decline line (bottom panel) chart from our latest technical update:

Note how a divergence in the A/D line from the direction of the index itself (top panel) preceded 23%, 11%, 32%, 13%, 12%, 9% and 7% declines respectively. 

While, by itself, poor breadth is not a sell signal, per the above, it has to be a red flag. The current extended divergence, by the way, is definitely concerning.

As for the S&P 500, I suggested in the video that it remained constructive. Well, as we close out this week, not as much.

Here we'll zoom in (SP500 A/D line in bottom panel, index itself on top):

Also with regard to the S&P 500 (white line below), the look when we compare it to the S&P 500 Equal Weight (all constituents equally weighted [green line]) is short-term troubling.

1-month chart:

And, lastly, back to the Nasdaq; panel 2 below illustrates the percentage of its members trading at new 52-week highs, panel 3 tracks the percentage of those trading at new 52-week lows:

Oof! You'd think with that stark a contrast that the Nasdaq Comp would be experiencing at least a mild correction, definitely not sitting at all time highs, which it is as I type... Red flag!

So why do we care? Well, suffice to say that a truly healthy market setup is generally one where most boats are rising with the tide. Poor breadth suggests that a given index is being propelled by a concentrated group of members. I.e., stress in a single stock, or a mere handful of stocks, can send an entire index reeling. Which was a much-documented phenomenon that preceded the bursting of the late-90s tech bubble. Here's Investopedia's definition:
  • Market breadth looks at the relative change of advancing to declining securities in a market.
  • Market breadth indicators may forewarn of reversals and uncover strength or weakness in the movements of an index that are not visible simply by looking at a chart of the index. This occurs when the indicator diverges from the index.
  • Indicators may look at advance and declining stocks, volume, the number of stocks reaching certain hurdles, and other metrics.

As for the other US major averages, etc., we track herein: SP500 Equal Weight down 0.38%, Nasdaq 100 up 0.65%, Russell 2000 down 0.32% so far this morning.

Asian equities were mostly higher overnight, with 11 of the 16 markets we track closing in the green.

Europe (reeling after Austria announced full COVID lockdown) is a mess this morning, with all 19 of the bourses we follow notably in the red.

The VIX sits at 18.33, up 4.21% (denotes caution).

Oil futures are down 2.69%, gold's down 0.25%, silver's up 0.13%, copper futures are up 1.88% and the ag complex is up 0.40%.

The 10-year treasury is up (yield down) and the dollar is up a not-small 0.36%.

Led by solar stocks, base metals futures, water infrastructure stocks, Latin American equities and tech stocks -- but dragged by energy stocks, uranium miners, MP (rare earth miner), Viacom/CBS and Eurozone equities -- our core portfolio is off 0.25% to start the session.

Here's another snippet from our colleague Hari Krishnan's latest, and enlightening, book Market Tremors:

"Minsky argued that the business cycle, with its exaggerated peaks and troughs, was a direct byproduct of a credit-fueled economy. Abundant credit might extend the bullish phase of the cycle, but comes at a cost. The subsequent crash would be much harder. In summary, leverage is a crucial parameter in the financial network, with banks acting as Dominant Agents in the creation and destruction of it."

Suffice to say that we presently reside in a "credit-fueled economy"... 

Have a great day!

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