The S&P 500 and Nasdaq 100 both hit record highs in November, but market breadth indicators largely failed to confirm these recent highs. The trends in the major stock averages are undeniably positive, but the lack of broad support suggests a painful reversal could be just around the corner. This chart shows the S&P 500 by close along with three common measures of market breadth: the cumulative advance-decline line, the percentage of stocks above their 50-day moving average, and the bullish percentage index. Notice how all three breadth indicators shown actually made lower highs in November, even though the S&P 500 rose above the 6,000 level. Market breadth indicators like these are equally weighted. This means that we simply calculate the number of shares that meet certain requirements. This can provide a compelling counterpoint to capitalization-weighted indices like the S&P 500, which are often overweighted by large-cap growth stocks. The rise-fall line has been trending downward since mid-October, and we can see that over time there are more stocks closing lower than closing higher. We also see that about 55% of S&P 500 members are currently above their 50-day moving average, down from about 82% at the end of September. The bottom panel displays the Bullish Percent Index, a breadth indicator based on point and numeric charts. Looking at the evolution of this indicator over the past six weeks, we can see that approximately 20% of S&P 500 members have registered a sell signal on their point and figure charts! To be clear, long-term measurements of width are still in decent shape. This chart shows the percentage of stocks that are above their 200-day moving average and the percentage of stocks that are above their 50-day moving average, as quoted above. About 70% of S&P 500 members are above their 200-day moving average, and we can see that the numbers are fairly stable through 2024. Therefore, the market upward trend is certainly supported by long-term breadth measures. Levels to Watch How do you approach a market that is strong in the long term but weak in the short term? I would argue that this is about focusing on risk management and the “lines in the sand” where we agree to re-evaluate long positions. The S&P 500 continues to make higher lows, but a drop below 5,850 would break a pattern that has been in place since August. For me the most important potential support level remains at 5,650. A drop below this threshold will result in a lower low, a collapse of the 50-day moving average, and the 38.2% retracement from the August-November rally becoming unmaintainable. If we get below 5,650, I will definitely be revisiting my bullish thesis by the end of 2024. Healthy bull market phases tend to have strong breadth characteristics because most stocks follow an overall bullish market trend. However, when the market starts making new highs in weak breadth conditions, the market starts to wonder if the index is not as healthy as we would like to believe. -David Keller, CMT marketmisbehavior.com Disclosure: (None) All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent companies or affiliates, and may have previously been disseminated by: It can be seen on television, radio, Internet or other media. The above content is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice, or a recommendation to purchase any security or other financial asset. The Content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your specific situation. You should strongly consider seeking advice from your financial or investment advisor before making any financial decisions. Click here for full disclaimer.
The chart indicates the possibility of a market sell-off just around the corner.
