Deteriorating Breadth – Warning Sign?

Jul 12, 2008: 11:22 AM CST

Friday’s action was important, in that breadth declined to new lows for the year, which certainly isn’t good news for the bullish camp.  Let’s look at a few charts and different perspectives on what this might mean.

First, the weekly chart of the NYSE New Highs minus New Lows overlaid against the backdrop of the Dow Jones Industrial Average:

The dark black line (scaled on the left axis) represents the NYSE New Highs – New Lows as programmed in StockCharts.com.  The reading slipped below -700 which represented a key low in the indicator as the Dow made yet another new closing low for 2008.

The downtrend in the NYSE High – Low breadth indicator is clear, and will be so until we can form a higher low.

The Monthly chart (same overlay) looks even more ominous (going back to 2000):

I wonder if somehow this chart is in error, or I have done the overlay wrong.  I’m afraid – if this is correct – then the chart speaks for itself.

I wanted to share a few other perspectives on the breadth from other bloggers:

Dr. Steenbarger does an excellent job of analyzing 2008 new highs and lows in the Wilshire 5000 Index in his post “Adapting to Shifts in Market Regimes“.  Steenbarger writes:

What that tells us is that, as prices move lower, longer time-frame participants are not finding value. What makes for a market bottom is the perception by these participants that the selling has been overdone; that bargains are to be had. When markets move lower and cannot attract buyer interest, they can only do one thing: probe yet lower value regions until equilibrium is attained. That’s exactly what we’ve been seeing over the last month.

Despite the name of the post, Dr. Duru also does very detailed analysis of the breadth measure of stocks being above their 40 day moving average in his post “Does the VIX Need to Spike at A Climactic Low?

Dr. Duru writes:

“Over the past 22 years, we have only had 50 trading days with lower T2108 (stocks trading below their 40 day moving average readings) than the current reading of 9.26%. 32 of those days (64%) came in the aftermath of the October, 1987 crash. The rest of these days cover major climactic moments from the past 20 years”

“We have now spent 7 trading days below 20% on T2108. 20% is considered oversold territory and the point at which new shorts typically represent poor risk/reward.”

“The oversold conditions we have today are sitting at historic proportions!”

Barry Ritholtz at “The Big Picture” shows a chart in his post “S&P 500 vs. AAII Bullish Index” (a sentiment indicator).

Things are different in the markets than we might expect or have become conditioned to accept.  Do be careful.

1 Comment

One Response to “Deteriorating Breadth – Warning Sign?”

  1. Anonymous Says:

    The difference here is that never before since 1929 have we seen such problematic conditions in the financial industry. Bluntly, its broken, and Fed doesnt know what to do, except try to extend it until after the election, but the democrats arent going to allow that. Its oversold short-term, long term, its going down, way way down. As a forward looking mechanism, its anticipation the depression thats coming, which is why things dont really look that bad…..yet..but the downhill snowball has started.