Pesky Breadth Divergence Persists
The S&P 500 recently moved above its February high to extend its uptrend, but all is not well under the surface. Fewer stocks are participating in the May advance and a key breadth indicator formed a bearish divergence. Bearish divergences form when price records a higher high and an indicator fails to confirm by forming a lower high. Bearish divergences in breadth indicators show that participation is waning. Fewer stocks are participating in an advance. This undermines an advance and makes the market vulnerable to a decline going forward. This was covered in Wednesday’s report and video at TrendInvestorPro.
The chart below shows the S&P 500 (main window) forging higher highs from February to late May (green arrow-lines). Higher highs are positive, but the trouble starts when we look under the hood. The indicator window shows the percentage of S&P 500 stocks above the 200-day SMA. This indicator exceeded 75% in early February, but did not make it back above 65% in April. The red arrow-line shows a lower high from February to April and this is a bearish divergence. Fewer stocks are participating in the advance.
Not only is participation waning, but more stocks are in downtrends than uptrends. The S&P 500 closed above 4200 on Friday and Monday. Despite another higher high, fewer than 50% of stocks made it above their 200-day SMAs. Currently, some 38.2% of stocks are above their 200-day SMAs and this means 61.8% are below. The majority of stocks in the S&P 500 are in downtrends and this argues for caution going forward.
TrendInvestorPro covered waning breadth and more in Wednesday’s report and video. This month we introduced a quantified trend-momentum strategy that trades stock-based ETFs. The final part will be published on Thursday, along with a signal table. Click here for immediate access.
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