S&P 500 and Market Breadth

The S&P 500 Index closed deeply in red at 2,656.10 level (-3.09%) on Wednesday, all three US major indices posted losses at the end of Wednesday’s trading session.

 It seems we have panic-driven selling by investors. The Dow Jones 30 and S&P 500 both turned negative for the year while the Nasdaq 100 is holding onto slight gains.

It is time to look at overall market breadth.

The percentage of stocks trading above 50-Day MA.

The percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index.

Specifically, the chart shows in the yellow line the proportion of the stocks that have seen their 50-day moving averages above their prices with the S&P 500 in the top window. The percentage line shows that only ~14% of S&P 500 members have their prices above 50-day MA.

So market breadth is weak when the minority of stocks are trading above 50-day moving average. A bearish view is present when the percentage line below the 50% threshold. Investors can look for oversold levels below 10%.

 The percentage of stocks trading above 200-Day MA.

Specifically, the chart shows in the yellow line the proportion of the stocks that have seen their 200-day moving averages above their prices with the S&P 500 in the top window. The percentage line shows that only ~34% of S&P 500 members have their prices above 200-day MA.

So market breadth is weak when the minority of stocks are trading above 200-day moving average. The S&P 500 Index is also trading below its 200-day MA. A bearish view is present when the percentage line below the 50% threshold. Investors can look for oversold levels below 20%.

S&P 500 Advance-Decline line.

The AD Line measures the degree of participation in an advance or a decline.

Specifically, the chart shows the S&P 500 in the top window and the AD line in the bottom window (the blue line). The AD Line confirms the decline of the S&P Index with similar movements. We note both S&P Index and AD line breaks down the upward trendlines drawn back in early 2016. The market is considered weak when the AD Line moves to new lows along with the underlying S&P 500 index.

Conclusion

 The market breadth indicators reflect a broad participation in the stock market decline.

However, there are a couple of things to think about with regard to indicators like these. Whenever you have a global equity selloff, these indicators are most likely going to spike, and the issue is they can spike during a correction as well as a bear market.

My instinct is to call the current readings an indication of global markets being oversold (not a real bear market). We’ve seen a reset in global equity valuations.

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