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[Markets] The Low-Down On Market Breadth

Via Dana Lyons' Tumblr,

The number of New Lows on the NYSE has expanded substantially, despite the fact that major averages just recently traded at 52-week highs; is that a sign of washed-out conditions or a deteriorating foundation?

Readers are likely aware that market internals, or breadth, play a heavy role in our quantified analysis of the attractiveness of the overall market landscape. Generally, it is in an effort to determine which direction most stocks are headed – and, thus, how we want our portfolio oriented. At times, though, we look for conditions to get so extreme in one direction that they become extremely prone to reverting to the other direction. For example, during the depth of a selloff, breadth can eventually become so bad that it can’t get any worse. Such conditions, i.e., “washouts”, can help investors identify likely bottoming junctures. That is the idea behind one of today’s Charts Of The Day.

Yesterday, the number of New 52-Week Lows on the NYSE equated to over 9% of all issues on the exchange. That is a very large number – particularly given the fact that the S&P 500 traded at a 52-week high just 7 days prior.

In fact, it was just the 9th such unique occurrence in 50 years.

It also got us wondering whether it was indicative of a washed-out condition and a likely bottom – or merely a deteriorating backdrop in the market.

We’ll let you be the judge.

Additionally, a key stock market gauge is testing a level that has proved to be important for several decades.

Technical analysts like to talk about important “levels” on the charts of various markets and indices. And while there may be many important levels on a particular index depending on one’s time frame, e.g., short-term, intermediate-term, etc., when it comes to the big picture, there are really relatively few levels of real critical consequence. One such level, in our view, is being tested presently in one of our favorite gauges in the entire U.S. equity market.

We are talking about the Value Line Geometric Composite (VLG), an index that tracks the median U.S. stock performance among a universe of roughly 1800 stocks. As we have said many times, this is one of our favorite measures of the health and direction of the overall market. We find it’s helpful to track it because research has shown that 70-80% of the determinant of the trend direction of a particular stock is based on the trend of the overall market.

So what is so significant about the current level? Let’s take a look at the VLG’s current location from a historical perspective.

In 1998, the VLG topped out at an all-time high level around 510. 9 years later, in 2007, the index again topped out ~510. Fast forward 7 years and we see the index (briefly) top out there one more time in 2014. At the market top in mid-2015, the VLG was finally able to exceed the 510 level — temporarily. After a false breakout, the VLG sold off hard in the subsequent correction. Finally, in 2017, the VLG was able to sustainably break out above the 510 level. Well, at least for a year.

During the correction last fall-winter, the index temporarily lost the 510 level again before quickly recovering it again in this year’s rally. The VLG tested the level again in May before bouncing to 540. Now, once again, amid the Trump/Tariff/Trade tantrum, we find the key VLG index testing this important multi-decade level once again.

So will this level continue to serve as support for the stock market? That remains to be seen. But, in our view, it is certainly one of THE levels to watch in the global equity world.

*  *  *

At The Lyons Share, we dig deeper into the historical statistics following similar conditions – and discuss what it means specifically for our investment positioning. If you’re interested in this “ALL-ACCESS” version of our charts and research, we invite you to check out the TLSsite. Considering the treacherous market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

Published:8/7/2019 9:02:45 AM
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