Updated: Oct 23, 2020
Market Breadth Indicator
Most traders and investors recognize the popular advancing issues minus declining issues technical indicator. This market breadth indicator is useful because it evaluates the internal health of the market, industry, or sector in question. Less popular is the percentage of the stocks trading above its 200-day ma indicator. This indicator is also helpful as it can also measure the degree of participation. A strong market or sector will often have most stocks in the index or sector trading above the pivotal 200-day ma. The more stocks that trade above the 200-day ma the stronger the market or sector trend, at least from the perspective of expanding market breadth. Conversely, breadth is weak when there are few stocks trading above the 200-day ma. A bullish trend tends to develop when the indicator is trading above 50% or more than half of the stocks in an index or sector are currently trading above the key moving average.
Traders and investors also rely on many overbought (OB) and oversold (OS) technical indicators to evaluate potential key reversals. The % of stocks trading above the 200-day ma is also an OB/OS indicator. As with many OB/OS indicators bullish and bearish divergences can signal a potential trend change in prices. Most indexes and sectors will trade at overbought levels above 70%-80% and most will trade at oversold levels below 20-30%. Bullish, and bearish divergences often produce stronger and more robust reversal signals.
The percentage of stocks above the 200-day ma is an excellent breadth indicator as it can help to measure the degree of participation. Broad participation often leads to a strong, sustainable, and healthy rally. Narrowed breath readings often denote less participation, weakening, and deteriorating price trend. A rising price trend that is not confirmed by expanding breath warns of underlying weakness. On the other hand, a falling price trend but rising market breadth signals a potential trend reversal to the upside. Remember, as with all technical indicators it is crucial not to rely on a single technical indicator. A technical indicator should be used in conjunction with other technical indicators and technical disciplines to confirm or refute existing technical trends.
Attached below is the % of stocks trading above the 200-day ma average technical indicator for the SPX Index as well as for the 11 major S&P 500 sectors. Also enclosed is a Relative Rotation Graph (RRG) of the % of stocks trading above the 200-day ma indicator for the 11 S&P sectors.
Based on the above analyses it appears SPX is trading in the middle of its 2-year range or at 48.40%. This suggests nearly half of S&P 500 stocks are currently trading above their 200-day ma and the other half below their 200-day ma. Despite the strong rally from the March 2020 bottom, SPX remains a selective market, and stock picking continues to be an important investment strategy this year.
On the positive side, a handful of S&P sectors continue to show strong or expanding market internals including S&P Technology (XLK), Consumer Discretionary (XLY), and S&P Healthcare (XLV). Based on continued expanding breadth readings these three S&P sectors will likely continue to lead the marketplace during the second half of the year. It is interesting to note that some of the economically sensitive sectors such as Materials (XLB) and Industrials (XLI) have begun to improve in their market breadth trends. If this sustains this support the basis for an improving economic environment, at least from a near-to-medium-term basis.
We are pleasantly surprised by the S&P Consumer Staples (XLP), a defensive-minded sector, as it is showing mixed technical readings. On one hand, the % of Consumer Staples (XLP) stocks trading above the 200-day ma indicator continues to display strong market breadth readings as evidenced by 69.70% of Consumer Staples stocks trading above their 200-day ma. On the other hand, the RRG study shows that XLP continues to weaken further as the S&P sector has recently slipped into the Lagging Quadrant.
Both the RRG and the % of stocks above the 200-day ma indicator strongly suggest S&P Utility (XLU), Real Estate (XLRE), Energy (XLE), and Financial (XLF) remain technically weak S&P 500 sectors from a relative perspective. We continue to recommend traders and investors remain cautious and be stock selective in these areas of the marketplace.