A Look at the Broader Market’s Internals
We have previously discussed the stock market’s deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively.
When more than 60% of stocks in the broader market trade below their 200 dma with the SPX not too far off an all time high, it is clear that cap-weighted indexes are helped up by an ever smaller number of big cap stocks. This typically happens near important trend changes, but it is not always certain that the market will decline significantly when such a divergence occurs.
One possibility is also that the market merely corrects, and resume its rally once a sufficient number of stocks becomes oversold. That said, the broader market hasn’t made any headway in more than half a year, with the volatility of major indexes and averages declining to multi-decade lows. It is certainly tempting to classify this period as one of distribution, especially given recent weakness.
In the short term, the large number of stocks in a downtrend may actually help produce a bounce, especially as some sentiment indicators such as equity put/call ratios have increased to a level usually associated with short term lows. However, we believe one has to take a differentiated approach to interpreting sentiment and positioning data at this juncture and we will explain why in more detail further below.
First let us look at the NYA internals mentioned above. In addition to the percentage of stocks below their 200 and 50 day moving averages, we show the cumulative NYA advance/decline line in the second chart below. The A/D line has been in a downtrend since late April.
The NYA and the percentage of stocks still above their 200 and 50 day moving averages. The market’s momentum peak occurred more than a year ago, in early July 2014 – click to enlarge.
The cumulative NYA A/D line has peaked in late April – then a divergence between the A/D line and the NYA was created in May. Such divergences don’t have to be meaningful, but they do occur at every major trend change. In other words, there doesn’t have to be a trend change when such divergences are spotted, but no trend change happens without them – click to enlarge.
The CBOE equity put/call ratio is currently at 0.81 – this is in the general area (0.70-1.10) that is often associated with short term lows – click to enlarge.