Understanding Market Themes From Sector Breadth

 For years, I have kept breadth data on the overall stock market, tracking shares making fresh highs and lows over various periods and the percentages of stocks trading above their short, medium, and longer-term moving averages.  What I've found is that shifts in breadth often precede shifts in overall market direction.  This is because certain parts of the market will break down or rebound ahead of the market averages.  Conversely, during trending moves, we will see the great majority of shares participate in market rises or declines.  The breadth extremes are an excellent alert for overall market momentum.This is a good example of how trading psychology is about the market's psychology, not just about our personal emotions and behaviors.  Breadth data are helpful in tracking changes in the sentiment of market participants.  Recently, I have built out spreadsheets that track breadth on a sector by sector basis, as well as breadth for various factors such as small cap vs. large cap and growth vs. value.  The idea is that the patterning of breadth changes among the sectors helps us track market themes.  So let's take an example from the recent market (data from the excellent Barchart site):In the last two trading sessions of the past week, the overall SPX moved higher by almost 1%.  Overall short-term breadth (stocks trading above their five-day moving averages), rose from about 26% to about 45%.  Interestingly, over that same time, the same breadth for consumer discretionary stocks went from about 20% to 25%.  The breadth for consumer staples shares went from 27% to 85%.  The breadth of energy stocks went from 61% to 22%; the breadth of financial shares went from 25% to 17% and the breadth of utility stocks rose from 0% to 73%.  This tells us several important things:1)  The move higher has not been a broad trending move.  It is quite mixed.2)  The move higher has benefited more defensive sectors (consumer staples, utilities) and not sectors that reflect economic growth (consumer discretionary, energy).3)  The recent reassurances regarding the banking sector of the economy have not yet pushed financial shares meaningfully higher.When we couple the pattern of market breadth with the movement of interest rates (lower), we again see defensive buying (bonds).  Interestingly, large cap tech stocks have similarly acted as a relative safe haven, with breadth over the past two sessions moving from 26% to 54%.The bottom line is that the patterning of breadth reflects a defensive market with lower rates, suggesting concerns regarding recession.  In tracking breadth going forward, I will want to see if the recessionary hypothesis/theme gains traction or reverses.  The shifts in the patterning of breadth among equities, as well as the shifts among asset classes and geographic regions, allow us to update our forecasts for markets and economies.  This enables us to be open-minded and flexible, even as we assertively pursue themes in play.Further Reading:How to Trade:  Breadth, Strength, Momentum.

Nov 29, 2023 - 00:18
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Understanding Market Themes From Sector Breadth

 

For years, I have kept breadth data on the overall stock market, tracking shares making fresh highs and lows over various periods and the percentages of stocks trading above their short, medium, and longer-term moving averages.  What I've found is that shifts in breadth often precede shifts in overall market direction.  This is because certain parts of the market will break down or rebound ahead of the market averages.  Conversely, during trending moves, we will see the great majority of shares participate in market rises or declines.  The breadth extremes are an excellent alert for overall market momentum.

This is a good example of how trading psychology is about the market's psychology, not just about our personal emotions and behaviors.  Breadth data are helpful in tracking changes in the sentiment of market participants.  

Recently, I have built out spreadsheets that track breadth on a sector by sector basis, as well as breadth for various factors such as small cap vs. large cap and growth vs. value.  The idea is that the patterning of breadth changes among the sectors helps us track market themes.  

So let's take an example from the recent market (data from the excellent Barchart site):

In the last two trading sessions of the past week, the overall SPX moved higher by almost 1%.  Overall short-term breadth (stocks trading above their five-day moving averages), rose from about 26% to about 45%.  Interestingly, over that same time, the same breadth for consumer discretionary stocks went from about 20% to 25%.  The breadth for consumer staples shares went from 27% to 85%.  The breadth of energy stocks went from 61% to 22%; the breadth of financial shares went from 25% to 17% and the breadth of utility stocks rose from 0% to 73%.  

This tells us several important things:

1)  The move higher has not been a broad trending move.  It is quite mixed.

2)  The move higher has benefited more defensive sectors (consumer staples, utilities) and not sectors that reflect economic growth (consumer discretionary, energy).

3)  The recent reassurances regarding the banking sector of the economy have not yet pushed financial shares meaningfully higher.

When we couple the pattern of market breadth with the movement of interest rates (lower), we again see defensive buying (bonds).  Interestingly, large cap tech stocks have similarly acted as a relative safe haven, with breadth over the past two sessions moving from 26% to 54%.

The bottom line is that the patterning of breadth reflects a defensive market with lower rates, suggesting concerns regarding recession.  In tracking breadth going forward, I will want to see if the recessionary hypothesis/theme gains traction or reverses.  The shifts in the patterning of breadth among equities, as well as the shifts among asset classes and geographic regions, allow us to update our forecasts for markets and economies.  This enables us to be open-minded and flexible, even as we assertively pursue themes in play.

Further Reading:

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