A 52-"Weak" High For Stocks?
While the S&P 500 his on an impressive string of new highs, a number of them have come on questionable breadth.
When it comes to analyzing the quality of a stock market rally, we are big on breadth, or the internals, of the market. The more participation there is on the part of all stocks, the better the foundation to support the rally. If the rally is reliant on only a relatively few large stocks, it only takes a few stocks breaking down to undermine the advance. On that basis, the quality of the post-August rally has been, for the most part, superb. The validity of that assessment over the past few weeks, however, has come into question due to an odd string of new highs.
Specifically, the S&P 500 has recorded 5 all-time highs over the past 10 days. Interestingly, 3 of those have occurred on negative NYSE breadth, i.e., more NYSE declining stocks than advancing stocks. If that seems unusual, it’s because it is. Looking back in our database to 1965, we find only 3 other 2-week stretches containing at least 3 new highs occurring on negative breadth:
The concern with these clusters of negative breadth new highs is that the rally participation may be starting to wane. Thus, despite the new highs in the average, the market may be getting more vulnerable.
Looking back at the prior clusters, did the performance of the S&P 500 bear out that concern? Well, the sample size is a minuscule 3 – but the evidence would clearly suggest no. We won’t present the full performance table following those 3 precedents, but we’ll say that 2 months later, the S&P 500 was higher by at least 4.5% each time. Furthermore, the worst 6-month drawdown of any of the 3 events was a mere -2.4%.
So, that puts some of the concern about weakening internals to rest – but, again, only based on 3 occurrences. We’d prefer a larger sample size in order to place any real measure of confidence in the data. If we relax the parameters a bit and look at clusters of just 2 negative breadth new highs within a 10-day span, we come up with 14 unique occurrences in 52 years, prior to the current one.