Market breadth is my latest worry. If you haven’t heard of this term before, then I will explain in just a moment…
While the raw numbers look good, my indicators show a potential problem.
The chart below is a little busy. But there are three things I want to show you:
Breadth is the black line in the upper panel. The dashed line coincides with a breadth reading above 70%. The blue line is the S&P 500 Index. The lower panel of the chart is my Income Trader Volatility (ITV) indicator applied to breadth.
For breadth, I am looking at the percent of stocks in the S&P 500 Index above their 200-day moving average (MA). The 200-day MA is an indicator of the long-term trend. The 10-year MA of this indicator is 66%. Readings above 70% are relatively rare.
As you may know, ITV is the award-winning indicator I developed to help me identify potential trades for my premium Income Trader service. ITV is similar to VIX in that it rises as prices fall. But unlike VIX, which only tells us about volatility of the S&P 500, we can use ITV on any number of individual stocks or indices. In this example, when ITV is bearish, we expect breadth to decline. Its current position, with the indicator just above the MA (the green line), points to potential weakness in stocks.
In the past, ITV on breadth has been useful in avoiding significant market pullbacks. The current “sell” signal coincides with a bearish divergence between price and breadth that can be seen in the top panel of the chart.
What This Means
A bearish divergence occurs when prices (the blue line) moves higher while breadth (the black line) declines. This indicates that the index’s advance is being powered by fewer and fewer stocks. The next chart shows those few stocks driving the index aren’t the usual suspects.
Here, the black line is the NYSE FANG+ Index. This is an index of some of the most popular stocks in the market.
This bull market has been built on strength on the FANG+ Index. The divergence visible in the chart bodes ill for the bull market. But the market can continue to rally, even as divergences mount. In the short run, we focus on our indicators, and use the tools we have at our disposal to trade accordingly.
My Income Trader Volatility (ITV) indicator remains bullish, as shown in the chart of the SPDR S&P 500 ETF (NYSE: SPY) below.
Again, ITV is similar to VIX in that it rises as prices fall. Its current position, with the indicator below the MA (the blue line), points to continued strength in stocks. The consolidation that developed between April and June points to limited upside, but it does point to upside potential.
Our last chart this week shows my Profit Amplifier Momentum (PAM), which is also bullish.
PAM is designed as a short-term indicator. Its recent uptrend is a potential indicator of strength.
Action To Take
Based on my indicators, I continue to expect gains in the S&P 500 in the short term. But if you’ve been reading my commentary for the past couple of months, then you know that I’m growing increasingly worried about the bull market’s ability to sustain itself.
That’s why I continue to advocate for trading strategies like the one we use over at Income Trader. As I’ve said before, I want to remain flexible with my trading capital. And with this strategy, we can earn immediate income payouts, and quickly move on to the next trade.
This strategy has delivered a 90.2% win-rate for my readers year after year, allowing them to generate thousands in extra income each month…
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