Market Breadth Update
Stocks were mixed on Tuesday, 4/13/21 after U.S. Food and Drug Administration (FDA) and Centers for Disease Control and Prevention (CDC) called for a pause in the rollout of the Johnson & Johnson's COVID-19 vaccine amid concerns over blood clots in a few individuals who previously received the vaccine. On the economic front, the Bureau of Labor Statistics reported the consumer price index (CPI) for March 2021 rose 2.6% over last year, or much faster than the street consensus view of an increase of 2.5%. Key U.S. stock market indexes ended the day mixed. Dow Jones Industrial fell -68.13 or -0.20%, Russell 2000 Index dropped -4.86 or -0.22%, S&P 500 Index rallied 13.60 or 0.33%, and Nasdaq Composite Index jumped 146.10 or 1.05%.
Although the U.S. economy and financial markets continue to improve, investors found reasons to worry. They continue to fret about an impending stock market bubble, fearful of a top in the real estate market, rising inflation concern, the spread of the new COVID-19 variant, another global shutdown, etc.
It appears the stock market continues to climb a wall of worry. The wall of worry is the stock market's tendency to rise higher in front of a host of economic, political, geopolitical events, and other concerns. The resilience in the stock market often reflects investor's confidence any outstanding issues will be resolved since stocks are forward-looking.
The market's ability to climb the wall of worry often occurs during three specific market conditions – at the end of a bear trend, near a market peak, and during periods of sharp market gains.
Market pundits can confuse the masses by issuing dire warnings and conflicting forecasts. Investors are human beings, and as emotional creatures, we find reasons to worry. The reasons may be real or not. However, it often depends heavily on an individual's perception of the market, investment goals, and risk tolerance levels. How an investor responds to the concerns often correlates to the willingness of the individual investor to take on risk in front of market uncertainties.
Technical speaking, the perception remains the byproduct of the emotional aspect of investing. It tends to be unstable and can change rapidly. What causes markets to sustain higher prices has nothing to do with perception. The market's ability to trend higher depends on the dominant and prevailing trend in the marketplace. After all, Newton's first law of motion describes inertia as a trend that is in motion will stay in motion unless acted on by a net external force. Market internals such as market breadth indicators can be excellent technical tools to confirm the inertia, the direction, and most importantly, the sustainability of market trends.
Breadth indicators offer an unbiased and broad assessment of the internal health of the market regardless of what the overall price index is doing. Such information may not be easily detectable by watching a price chart alone. Whether the market rally is broad-based or narrowed-based can help to decide if the uptrend is sustainable or short-lived. By combining market breadth indicators with other technical indicators, an investor can better evaluate the internal health of the market.
With the above thoughts in mind, are updates to the advancing minus declining issues market breadth indicator (A-D) applied to popular stock market indexes such as SPX, INDU, NYA, COMPQ, NDX, MID, and SML.
In summary, market breadth remains one of the better technical indicators to evaluate the sustainability of a trend. Expanding market breadth reflects broad participation in the market, which leads to a sustainable and longer-lasting uptrend (rally). For the most part, a review of the market breadth indicators for major US equity markets convey bullish market conditions. Expanding market breadths to new all-time highs coupled with new all-time price highs bodes well for the continuation of the bull rally.