August 23, 2021
Good morning,
Last week’s 50 bps decline (-0.5%) on the S&P 500 index disguised the real correction that transpired in the broader market. The Russel 2000 index (small caps & value), the MSCI EAFE index (international developed market), the MSCI EM index (emerging market), and commodities broadly speaking all suffered corrections 8-10 times that of the S&P.
Consequently, trend evidence (the Tape) has been leaning more cautious. The main culprit as you can imagine from the index action described above is bad breadth”, particularly in the secondary averages like the NASDAQ and the Russell 2000. As the market made a series of new highs on the S&P 500 in recent weeks, the number of weekly new lows in individual securities rose significantly. It has historically been true that when the foot soldiers give up, even as the generals march ahead, it is often a bad sign.
The poor Nasdaq breadth has gotten so bad that new lows have actually exceeded new highs recently. This is a warning, even as the NASDAQ index made new highs. Note however that while this is a negative signal, it is a poor timing mechanism as the condition can last a long time.
The Technical/Quantitative market analysis methodology is a body of evidence methodology first and we will move “bad breadth” over to the cautious side of the ledger. The most important Tape indicator (Big Mo Composite – we’ve covered it extensively before) has remained steady in the lower region of its neutral zone for many weeks now. With the negative breadth signals developing, it would take a move into the bearish zone for Big Mo in order to incorporate a more cautious stance in portfolios.
Be well,
Mike