Strongest When They are Broad
Last week in my class at Baruch College (well on Zoom) I had my friend J.C. as a guest speaker. I like to have give the students a break from hearing just my voice, as soothing and insightful as it is, to hear from other technical analysts who are looking at markets every day. This also gives students a chance to see how others use the tools that they are learning in the class in the “real world.” I have known J.C. for a while and have had him address the class in the past. What’s great about having speakers like him is that they are not preparing a lecture. The content that they present is what is actually happening in the market at that point in time.
J.C. touched on the concept of market breadth and how it is fairly constructive right now. Market breadth measures the degree to which the individual stocks that make up the market are moving in the same direction as the market itself. J.C. used a great analogy of a sports team. He highlighted that a team may have the best player in the league on the roster and that player may help the team win a fair amount of games during the season but it’s the team where the entire roster is playing their parts that is most likely to win the championship at the end of the season.
The market works in a similar fashion. It is strongest when there are many individual names moving higher. This is to say that breadth is strong. There are many ways to look at breadth but since I believe in following the trend, I like to come at it from that perspective. I also like to look at the market across different time frames: long-term, intermediate-term and short-term. All of these trends have a way of interacting with and impacting each other. The way I like to do this is to look at the percentage of stocks that are above their respective 200-day (long), 50-day (intermediate) and 20-day (short) moving averages. The theory is that the higher the percentage across these time frames, the strong the market. Going back to the sports analogy, the more players that are playing their parts at a high level, the more likely it is that the team is doing well.
Looking at the percentage of stocks listed on the New York Stock Exchange that are currently in long-term uptrends, above their 200-day moving average, we can see that it stands at 77%. I like to think of anything above 60% as a healthy majority.
For the intermediate term, the percentage of stocks above their respective 50-day moving averages is also healthy at 81%.
Not to sound like a broken record (at least you aren’t listening to me) but the same holds true for the short term, with 86% of the names listed on the NYSE trading above their respective 20-day moving averages.
So across time frames, we have a healthy majority of stocks above their moving averages. The saying goes something along the lines of “markets are strongest when the strength is broad.” That claim can certainly be made now.
And as I have been writing for a while now, this is largely a function of the fact that the market is pricing in a future that looks better than the present, even if only marginally so. Yesterday marked the third consecutive Monday with a positive vaccine announcement with AstraZenaca (AZN) joining Moderna (MRNA) last week and Pfizer (PFE) the week before with good news on the efficacy of their COVID vaccines.
At the same time, two measures of the US economy, the Manufacturing PMI and the Services PMI (or Purchasing Managers Index) came in at 56.7 and 57.7 respectively. Anything over 50 is a sign of economic expansion. Both also beat expectations. So the economy continues to improve, at least in the near-term. This is likely priced in by investors now, so the key will be for metrics to exceed expectations in order for the market to continue to move higher. So far, so good. The S&P 500 and the Russell 2000 are trading at / near all-time highs, the Nasdaq 100 is close. It’s a holiday week so anything can happen.
I write about market breath every week for our clients to give them a sense of how these metrics are shifting in real time. You can learn more by going here: