Tags: market | data | breadth | stock

Deep Look at Data Shows Market Vulnerable to 2000-Style Selloff

By    |   Wednesday, 03 Jun 2015 08:16 AM

Some analysts look at market breadth data to determine whether stocks are likely to rise or fall. Market breadth shows the number of stocks that are participating in the primary trend.

Market breadth is often explained with a military analogy. In the military, a battle is won by the troops in the field. A general can lead the advance against the enemy, but if the troops are not behind him on the battlefield, victory is unlikely. In the stock market, the troops are represented by individual stocks. Major market indexes can be considered the generals.

If the market indexes (generals) are making new highs but most individual stocks (the troops) aren't following, the indexes are unlikely to continue much higher.

In 1999, the stock market indexes were led higher by just a few Internet stocks and the majority of stocks were not participating in the rally. In early 2000, the bubble burst and the indexes turned lower. This pattern has been seen at other major market tops.

One way to define whether or not most stocks are participating in the rally is to look at how many individual stocks are near new 52-week highs. The majority of stocks in the S&P 500, 54 percent, are not within 10 percent of a new high. This indicates the recent new highs in the index are on shaky ground.

Digging deeper, we learn that only 16 percent of the individual stocks in the S&P 500 index are within 10 percent of new 52-week highs. The recent rally in the index has been based on gains in a small number of stocks.

It's possible other stocks will begin to confirm the new highs in the index. But until that happens, investors need to remain cautious. Breadth statistics indicate this rally is unfolding in a way eerily similar to the 1999 blow-off top seen in the stock market. After the top was formed, a memorable sell off followed. If history repeats, we could see a bear market in the near future.


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MichaelCarr
Some analysts look at market breadth data to determine whether stocks are likely to rise or fall. Market breadth shows the number of stocks that are participating in the primary trend.
market, data, breadth, stock
336
2015-16-03
Wednesday, 03 Jun 2015 08:16 AM
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