Macro Wrap – Bad Breadth Stinks, $SPX, $SPY

by Enis June 21, 2013 6:46 am • Commentary

I’ve felt like a broken record over the past month mentioning weakening breadth in the market.  My Chart of the Day post on June 4th explained my concern back then, and in the intervening days, it has only gotten worse.

Simply put, breadth is a sign of buying power.  Are investor monies plentiful enough to move all stocks higher together?  Or are there only pockets of strength that are moving the broader indices up?  On a global basis, that’s also part of the reason why it has been concerning in the second quarter of 2013 to see so many other equity markets break down.  That’s a sign (as is the decline in commodities) that global investor funds are less plentiful than they were in the first quarter of this year.

But back to U.S. stock market internals.  The number of stocks on the NYSE making New Highs vs. the number of stocks making New Lows is one way to see the breadth of the advance.  Here is the 4 year chart of that indicator:

4 year chart of NYSE New Highs minus New Lows, Courtesy of Bloomberg
4 year chart of NYSE New Highs minus New Lows, Courtesy of Bloomberg

I’ve drawn the red line at the current reading, which is almost -1000.  That is the weakest reading since November 2011, and much weaker than at any point in 2013 (the prior low was in April, around -500).

We also had the lowest single day reading of NYSE Advancers yesterday since 2011, at 149.  Here is the 4 year chart of daily Advancers:

NYSE Advancers daily chart, Courtesy of Bloomberg
NYSE Advancers daily chart, Courtesy of Bloomberg

I’ve drawn the red line around 500 and the green line around 2500, generally considered extreme days for this reading.  For most of 2013, we had very extreme up or down readings, which is indicative of a stock picker’s market.  But in the past month, you can see that we’ve already had 3 breaches of 500 and 1 breach of 2500, another sign that volatility is back.  This has become a macro, all-or-nothing market, where single stocks matter much less than the broad strokes of global asset classes.

While the SPX only broke the 50 day moving average for the first time in 2013 yesterday, breadth and severe weakness globally has me thinking that this is just the beginning of the pullback.  I view a multi-month, more severe selloff as the more likely scenario here.  Always willing to change my mind, but the odds still seem to favor lower stocks prices in the month ahead.