ANOTHER LOOK AT MARKET BREADTH
ADVANCE-DECLINE LINE BOUNCING... A glance at various measures of market breadth offers good and bad news. All of them are lagging behind the S&P 500 which is a caution sign. The good news is that they're bouncing off potential support lines. Chart 1 compares the S&P 500 (black bars) to the NYSE Common Stock Only Advance-Decline Line (red line) over the last nine months. It shows the red line falling more than the SPX during August. But it also shows the red line bouncing off its 200-day moving average (red arrow) and trading back above its blue 50-day moving average. On a longer range basis, the chart also shows the AD line still trading well below its February high, while the SPX has exceeded that earlier peak. So while the short-term trend may be improving, the longer-term trend is still of some concern.
S&P 500 STOCKS ABOVE MOVING AVERAGE LINES... Chart 2 shows the percent of S&P 500 stocks above their 50-day moving average falling all the way to its June low during August which reflects weakness in the broader market. But it is bouncing off that potential support level from an oversold condition. It still has a long way to go, however, before it regains its own moving average lines. Only 47% of SPX stocks are now above their 50-day line.
Chart 3 shows the % of SPX stocks above their 200-day average falling during August to its current reading at 58%. [That means that 42% of SPX stocks are still below their 200-day average]. There again, however, the red line is bouncing from an oversold condition. But it remains below its own moving average lines.
SMALL CAPS CONTINUE TO LAG BEHIND... Previous messages on market breadth have pointed out that most of the weakness in the broader market has beeen seen in smaller stocks (which include midcaps). And that's still the case. The daily price bars in Chart 4 show the Russell 2000 iShares (IWM) bouncing off chart support along its June low and its 200-day moving average while in a short-term oversold condition. On a longer-term basis, however, the inability of the IWM to exceed its February peak casts some doubt on the strength of the broader stock market.
BONDS TEST PREVIOUS SUPPORT... Rising bond yields are one of the factors pressuring stocks during August. My previous message showed the 10-Year Treasury yield testing its previous high formed last October. A pullback in bond yields has probably contributed to this week's rebound in stocks. And has caused a rebound in bond prices. Chart 5 shows the 20 Year Treasury Bond iShares (TLT) finding some support along its October-November lows while in an oversold condition. The chart carries important longer-range implications. Higher bond price imply lower bond yields which would be good for stocks. Lower bond prices, however, and higher yields could have a more negative impact on stock prices.
