Like the VIX, market breadth can be helpful at times and confusing/not particularly helpful at times. For our approach and our timeframe, the helpful periods tend to come in short bursts near peaks or near reversal lows. Therefore, it is possible we can gain some additional insight by reviewing market breadth in the coming days and weeks.
The chart below shows NYSE New Highs - New Lows before and after the S&P 500 intraday low that was made on February 9, 2018. Notice how breadth improved after the low, but did still experience some significantly negative readings after the low (-150, -200, -140). The March 23 low of -199 was lower than the March 1 low of -154, but both were quite a bit higher than the lows in early February.
As of yesterday’s close, the pattern below (thus far) is not all that different from the February low above; an ugly reading near the low and thus far, tamer negative readings. However, there is one notable difference; the lowest reading below of -521 is lower than the lowest reading of -470 at the February low.
If we look at the 2011 case, a few things jump off the page. The lowest reading is in the neighborhood of -1400, which is much uglier than the lowest readings thus far in 2018. Given the 2011 case was followed by big gains in the stock market, low breadth readings viewed in isolation do not mean a bull market is dead and buried. In the 2011 case, breadth improved considerably after the low in the stock market.
When we review the major 2007 stock market peak, notice how breadth begins to deteriorate in a much tamer fashion than the corrections, but eventually picks up steam. Intraday data is not available in the period shown below.
How can these anecdotal cases possibly help us in 2018? In simple terms, the tamer the subsequent declines in market breadth, the easier it is to remain open to the possibility of a bottoming process. The weaker breadth is in the coming days and weeks, the easier it becomes to remain open to a series of lower lows in the coming weeks and months. Breadth is one small piece of the weight of the evidence.
Last week’s video contained numerous data sets that told us to keep an open mind about better than expected outcomes. The video also contained the following:
“We can’t emphasize enough, none of this erases or takes away the 100% legitimate concerns that we have in the short-to-intermediate term. The market has a lot to prove to us [see clip here].”
When we talk about retests, it does not negate the concerning hard data we have in hand, nor does it imply the prior low is “the low”. Having said that the October 30, 2018 Short Takes post noted:
“Notice how it is not uncommon for the stock market to push higher and then backtrack to retest the prior low, something that may or may not happen in 2018.”
Retests can take many forms. Retests can come down near the prior low, to the prior low, or drop below the prior low. Retests can pass and retests can fail. Thus, if we are patient, we will learn something either way.
We have a very specific plan if the retest fails. The plan was covered from a generic and conceptual perspective Monday. A second post dated Tuesday, November 20 covers a new S&P 500 setup. The concepts in the following posts remain important relative to remaining open to all outcomes under all circumstances:
Illuminating Charts: Investing Timeframes
S&P 500’s Second Line Of Defense
Why It Is Prudent To Take A Big Step Back
Whipsaws And Market Guideposts
We have hard data in hand that says “remain open to a new downtrend and sustained bear market”. We also have hard data in hand that says “remain open to a bullish reversal and the end of a correction.” Experience says it is best to “stay in the now” and remain highly flexible.
