Market Halitosis

Mrs. Market appears to be suffering from an acute bout of market halitosis (a.k.a. market breadth) which was heavily advertised on various bearish watering holes yesterday. Goldman Sachs was particularly prolific on the subject, going as far as predicting an imminent ‘momentum’ crash – whatever that is. So let’s take a gander through some of our momo charts and see if indeed the proverbial jig is up for this counter rally.

At first sight our SPX breadth chart does show an elevated reading of 2.4, which certainly is high in the context of recent history. However the two questions we should ask ourselves are:

1. Does a high market breadth reading necessitate an ensuing sell off or market crash?
2. If 1 is true – then what is the delay between a high reading and the responding corrective price action?

The answer to 1) is mixed – although the chart above hints toward a high probability of a market correction I decided to go back a few more years to expand our dataset.

Here is a snapshot of the 2007 to 2012 period which by all definitions was pretty turbulent. The first thing that stood out to me was that the most excessive readings actually occurred near the major market bottoms, and I can only imagine how many hapless bears got sucked into backing up the truck during those periods.

Per question 2) I do see indication that a push above the 2.0 mark eventually leads to a correction but the charts make it pretty clear that there usually is a strong delay until the market responds. In fact it often takes weeks or even months and then only after the signal has dropped back below the magic 1.0 mark.

Here’s NYSE market breadth which incidentally is doing a pretty bang job at market bottoms. We ought to be looking at that one a bit more often! Mia culpa.

So our take away when it comes to excessive market breadth is three-fold:

1. Readings > the 2.0 mark on the SPX breadth chart have a strong bias toward an ensuing correction.
2. In almost all cases a drop below the 1.0 mark is required for price to respond.
3. Excessive signals during sell offs or sideways markets after a sell off seem to accompany market bottoms.

Good to know! Alright, a few more market momentum charts below the fold for my intrepid subs:

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