By just looking at the indices $SPX, $COMPQ, $RUT, $DJ30, you really can’t say anything negative about them, they are all trading near all time highs. However, the breadth deterioration underneath the surface is real, not only have many stocks stop going up but we are now seeing an uptick in stocks going down. The charts below tell you the whole story.
The question is; is this information actionable right now? The answer is no, at least for me its no. Breadth divergences have been going on for a while, it was the most popular topic for financial bloggers in 2013. And every time the market looked and felt like it was going to crack it bounced, and it bounced hard. Rotation has been the key, they take one group to the woodshed and then normally the most recent weakest group bounces.
I have no interest in shorting individual common stocks even though the breadth says that it’s wise to do so. My fear of waking up one morning to a buyout is greater than my greed to make a few dollars on a short. As far as shorting the indices, the price action is not confirming what is happening with stocks. I need to see a pattern of lower highs and lower lows to take a short strictly on the breadth numbers. For now this something that’s in the back of mind and either stocks will catch to the indices or the indices will catch to the stocks.
p.s. I use the Russell 2000 instead of the SP500 because I believe its fairer comparison since the Russell has almost 2000 stocks and the breadth numbers include a majority of trade-able stocks.