I’ve touched on the importance of breadth before, like in this CotD from last month. The index can go up, but the market under the hood is getting weaker. The index can go down, but the market under the hood is getting stronger. A healthy market has broad participation, while a market in its last throes has only a few big components leading it higher.
In the most recent rally from 1325 to 1380 in the last week in SPX, the SPX made a 10 week high, but new highs for individual issues were much weaker, as shown by this chart of new highs on the NYSE:
The new highs in early July after the European summit were much higher than the new highs on the rally that peaked yesterday, indicating a weakening rally even though we made a new high in the index. This weakening breadth is part of the reason why we have continued to initiate new bearish positions throughout this week despite our existing bearish posture.
Similarly though, we will need to watch how well breadth holds up on the current down move. So far today, NYSE advancers are at their lowest level since June 25th, indicating that today’s weakness could be the start of a more significant correction.