I want to take a look at a critical question: Does the market have bad breadth? Spoiler alert – not quite yet, but we may be getting close. We’ll break down three market breadth indicators, explain how they're still holding up, and discuss what would tell us we’re in trouble. Let’s dig into the charts.
The Question of Breadth
Does the market have bad breadth? As of early October 2024, the answer is “not yet.” The overall market breadth still looks okay, but some signs suggest we may be reaching an exhaustion point. Let’s go through three key breadth indicators and see what they’re telling us right now.
1. New 52-Week Highs and Lows: The Divergence to Watch
First up, let’s talk about new 52-week highs and lows. This indicator is a great way to gauge the strength of a market. When the market is in a healthy bull phase, you’ll see lots of stocks making new highs. That makes sense, right? When the S&P 500 or the Nasdaq is hitting all-time highs, you’d expect the individual stocks within those indexes to follow suit.
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Looking at the chart, the green bars represent new 52-week highs, and the red bars represent new 52-week lows. In a bull market, you won’t see many new lows because most stocks are riding the overall upward momentum. But here’s where things get interesting: toward the end of a bull market, we often see a divergence. The market keeps making new highs, but fewer and fewer individual stocks are hitting new 52-week highs. Instead, some stocks are starting to make new lows. This divergence can be an early warning sign that the market is running out of steam.
Right now, in early October, as the S&P 500 closed above 5700 for the first time, we’re seeing fewer new highs and even a few new lows sneaking in. It’s not time to hit the panic button, but it’s something to keep an eye on. If new lows start to consistently outnumber new highs, that’s when I’d start to worry about a more serious market pullback.
Source: StockCharts.com
2. Percentage of Stocks Above Key Moving Averages: Long-Term vs. Short-Term Signals
Next, let’s look at the percentage of stocks above their key moving averages. This is one of my favorite breadth indicators because it gives us both a long-term and a short-term view.
In the top panel of this chart, you’ll see the S&P 500 over the past two years. Below that, I’ve plotted two key breadth indicators: the percentage of S&P 500 stocks above their 200-day moving average (currently about 76%) and the percentage above their 50-day moving average (about 75%).
The 200-day moving average is a long-term indicator. I like to use the 50% level as a key threshold—when more than half of stocks are above their 200-day moving average, it suggests the long-term trend is still intact. Right now, we're well above that level, which tells me the long-term breadth is still positive. The last time we dipped below 50% was back in September 2023, which coincided with a pullback in the broader market.
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Now, the 50-day moving average gives us a short-term view. I’ve drawn horizontal lines at 75% and 25% on this chart, and we’re currently just below the 75% mark. Historically, when we drop below 75%, it suggests a short-term pullback may be coming. We saw this happen in late August during the most recent pullback, and it’s something we should be prepared for now as well.
But, remember, this indicator isn’t foolproof. Earlier this year, in January, the “Magnificent Seven” stocks were so strong that they kept pushing the indexes higher even though the breadth was weakening. We could see a similar scenario play out now, so while the short-term breadth is a little shaky, the long-term picture still looks solid.
Source: StockCharts.com
3. Bullish Percent Index: Point and Figure Charts Tell the Story
The third indicator I want to highlight is the Bullish Percent Index (BPI). This is a breadth indicator based on point and figure charts, which are a bit different from the more traditional line or bar charts we usually look at. The BPI tracks how many stocks in the S&P 500 are giving a buy signal based on point and figure patterns.
I like to focus on the 70% level here—when more than 70% of stocks are on buy signals, it usually means we’re in the later stages of a bull market. Right now, we’re sitting around 78-79%, so the market is still in pretty good shape. But, just like with the other indicators, I’m watching for when we drop below that 70% level. When that happens, it’s often a sign that the bull run is losing steam.
If you look back over the last couple of years, you’ll notice that whenever the BPI drops below 70%, we tend to see a pullback shortly after. This happened in January, though the “Magnificent Seven” kept the market artificially strong for a while. But in most other instances, a break below 70% has been a reliable signal that the market is transitioning from a bullish to a more cautious phase.
Source: StockCharts.com
What These Indicators Are Telling Us
So, what’s the takeaway here? Overall, the market breadth indicators are still pointing to a relatively healthy market, but there are definitely some cracks forming. The new 52-week highs are drying up, fewer stocks are holding above their 50-day moving averages, and we’re nearing a critical level on the Bullish Percent Index.
None of these indicators are flashing “sell” signals just yet, but they’re all telling us to be cautious. As we move further into Q4, keep an eye on these charts. If new lows start to outnumber new highs, or if we see the percentage of stocks above their 200-day moving averages drop below 50%, that’s when I’d start to be more concerned about a potential market downturn.
So, does the market have bad breadth? Not quite yet. But the warning signs are there, and it’s always better to be prepared than caught off guard. As always, I recommend keeping a close eye on these indicators, doing your own due diligence, and staying informed.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.