Katie Stockton on whether it’s time to start worrying about weak market breadth | Wilnesh News
U.S. stocks have contracted gains over the past few weeks even as the S&P 500 sits near all-time highs, suggesting the major indexes have narrowed their recent gains. The contraction in breadth is evident in cumulative breadth indicators such as the NYSE Cumulative Advance-Decline Line, which has retreated since mid-May. The short-term momentum of the up-down line is on the downside, and the line has room for the next support from the daily cloud pattern (shaded area on the chart). This suggests market breadth could fall further in the near term, which is a near-term risk for the major indexes as declining stocks outnumbered advancing ones on the NYSE. The breadth of weakness underlying the market is also reflected in the ratio of the small-cap Russell 2000 to the S&P 500, which recently fell to a new 52-week low. The breakout marked a setback for small-cap stocks relative to large-cap stocks, a continuation of the ratio’s major downward trend. In absolute terms, the Russell 2000 Index has retreated since mid-May and remains in line with the advance-decline line. The major indexes have been trending higher recently, but there are signs that market breadth is deteriorating with negative divergence. When there is negative divergence between the price and breadth indicators, we will be more sensitive to any “sell” signals that appear. Fortunately, while short-term width may be contracting, the breakout of the NYSE advance-decline line ahead of the current pullback suggests that width should eventually expand to support the S&P 500’s cyclical bull trend. It is healthy for cycles to breathe contracting during an uptrend because it can restore demand when the market extends. —Katie Stockton and Will Tamplin Get free access to Fairlead Strategies research here. Learn more about Fairlead Tactical Sector ETF (TACK) here. Disclosure: (None) The above is subject to our Terms and Conditions and Privacy Policy. 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