Macro Wrap – Longer-Term Measure of Market Breadth

by Enis March 19, 2013 8:12 am • Commentary

Market breadth is a topic with its own library of literature.  Books from a century ago by stock market operators mention the importance of market breadth.  Here’s an excerpt from Justin Mamis’ 1991 book, The Nature of Risk, describing conditions to watch for a topping market:

  1. A prolonged distribution of individual stocks so that breadth statistics and the number of new highs gradually begin to “fail” – registering readings that are less than statistics seen at previous DJIA highs.
  2. In contrast, the averages, especially the blue chip Dow, continue upward.  The “news” is cheerful, often even glowing.  The apparent narrowing is masked by excitement of large gains concentrated in a few conspicuous stocks.
  3. Declines that ensue still look like “normal” corrections that bulls have bought into any number of times along the way up, but this time rebounds have lessened volume and vitality, to go along with the increasingly negative statistics.  Some stocks are already starting down seriously, as switching into was is still “okay” – typically, both the bottom of the barrel and the blue chips – intensifies.
  4. Eventually there is a sufficient break in the averages to cause the longer-term moving average lines to finally roll over and head downward.

First, a caveat.  Mr. Mamis mentions numerous times in the book that each market scenario is unique, so a broad awareness helps, but each situation will be different from the past.  In that sense, not every top will look like what’s described above.  But those statistics of breadth that he mentions are a useful guide.  With those thoughts in mind, how do the “statistics” currently shape up?

Two charts illustrate that the calls for a top might be premature.  First, here is the 10 year chart of the percentage of NYSE Stocks Closing Above the 200 day Moving Average, Courtesy of Bloomberg:

Screen Shot 2013-03-19 at 8.02.01 AM


We are currently above 80%, at the upper end of the 10 year range, so breadth readings not showing much weakness yet.  In 2007, in the 6 months leading up to the Oct 2007 S&P 500 top, breadth steadily deteriorated, as shown by the red arrow.  I’ve circled the actual date of the market top, when this percentage registered around 53%.

A second measure of breadth is new highs minus new lows on the NYSE.  Here is the 10 year chart:

NYSE New Highs Minus New Lows, 10 year, Courtesy of Bloomberg
NYSE New Highs Minus New Lows, 10 year, Courtesy of Bloomberg


This reading was not as clean in 2007, and I don’t see much of note in the current situation either.  But if you did start to see a significant drop off to near the 0 level with the market still making highs, that would be a warning sign.

In short, the odds that we’re close to a long-term market top here are not high.  Having said that, in the short-term, I do think we’re due for a pullback, but this is still a market where nimbleness is likely to be rewarded over stubbornness.