BREADTH SURGES ON BIG MOVE - SPX VOLUME VALIDATES SURGE - NDX VOLUME IS UNIMPRESSIVE - BEAR MARKET RALLIES CAN BE SHARP
BREADTH SURGES ON NASDAQ AND NYSE ... Market breadth provides a means to measure the degree of participation in a market move. After big moves, breadth and volume are my first ports of call to judge the robustness of a move especially an advance. Advances with strong breadth and high volume are more sustainable than advances with weak breadth and low volume.
With the major indices up 6-7% on Tuesday, let's look at the key breadth statistics for the NYSE and Nasdaq. Chart 1 shows the breadth overview for the NYSE. The first indicator shows net advances ($NYAD), which equals advancing issues less declining issues. Notice that net advances surged to its highest level since late November. This shows broad participation in Tuesday's rally. The second indicator shows net advancing volume ($NYUD), which equals advancing volume less declining volume. This indicator also surged to its highest level since late November. With both indicators reaching their highest levels since late November, participation looks broad and this rally may have some legs. The bottom indicator shows net new highs ($NYNL), which equals new 52-week highs less new 52-week lows. Despite a huge advance in the market, there were still more new lows than new highs. That's because net new highs is a lagging indicator. Even after the December rally, net new highs stalled at the zero line. It takes more than one day of strength to turn this indicator, and the bear market, around. Chart 2 shows the Nasdaq with the same set of indicators and the similar results. You can click on these charts to see the settings and save to your Sharpcharts.
Chart 1
Chart 2
VOLUME SURGES ... When it comes to volume, I like to use the S&P 500 and Nasdaq 100 volume figures. These key indices are made up of common stocks, pure and simple. Chart 3 shows the S&P 500 with volume over the last six months. Notice that two big volume days marked the November low. The first day featured a volume spike and sharp decline. The second day witnessed a sharp surge on even bigger volume (red arrow). The sharp decline on high volume signaled capitulation, while the subsequent high volume surge validated the recovery. Looking at the current low, I also see signs of capitulation and a validated recovery surge. There was a volume spike above 7.5 billion shares in late February. In fact, the index declined five days in row with above average volume (yellow area). This smacks of capitulation. Volume on Tuesday's surge exceeded 7 billion shares, which is the second highest of the year. On the face of it, volume appears to validate the surge. Of note, over 1.1 billion shares were traded in Citigroup (C) alone. Bank of America (BAC), General Electric (GE), Wells Fargo (WFC) and JP MorganChase (JPM) accounted for another 1.1 billion shares. Without these five stocks, volume would have been closer to 5 billion shares, which would not have been significant. Hmm....something to think about there.
Chart 3
Chart 4
Chart 4 shows the Nasdaq 100 with volume. While S&P 500 volume was impressive overall, Nasdaq 100 volume was not that impressive. As with the S&P 500, the November low was marked by two big volume days. The first was a sharp decline with over 1.5 billion shares and the second was a sharp recovery advance with over 1.5 billion shares. NDX declined with the rest of the market from early February to early March. However, I do not see a significant increase in volume that would denote capitulation. Further more, volume on Tuesday's advance was not that impressive. This detracts from Tuesdays' bounce off the November low.
BIGGEST MOVE SINCE LATE NOVEMBER... In addition to the biggest breadth surge since late November, Tuesday's advance in the S&P 500 was also the biggest percentage gain since late November. Before getting too excited about breadth, volume and the percentage advance, there are two items worth considering. First, the bear market contains a number of surges greater than 5% that did not result in a sustainable rally. The red arrows show one in late September, two in October and one in mid November. It was not until the S&P 500 put together two consecutive 5% surges in late November that the rally took hold. The second surge represents follow through that is needed to show more than just short-covering. Second, bear market rallies are known to be swift and steep. The late November rally started with a 100 point surge (750 to 850) in two days. It took the index another 28 days to move the next 100 points (850 to 950). Point-wise, the prior bear market rally was half finished after the first two days. Not all bear market rallies are the same, but history suggests that the initial surge is the sharpest. At this point though, we are still looking for follow through.
Chart 5
