I was asked recently, more than once, about the recent Breadth Thrust. It is not something I have spent much time, if any, studying, so I don't have any firm statistics for you on the indicator. But I view this indicator much in the same way as I view the Hindenburg Omen: you're giving a fancy name to something we already know.
For those not familiar with the Hindenburg Omen, it's an indicator that requires, among other things, a rise in stocks making new lows and a declining McClellan Summation Index. So whenever I am asked about it, my answer is always: if the number of stocks making new lows is rising and far higher than the number making new highs and the Summation Index, which tells us what the majority of stocks are doing, is heading down, don't we already know the market is weak? Why do we need a fancy name to tell us this?
A Breadth Thrust tells us breadth is strong. Well, don't we know that? I mean you don't get the Overbought/Oversold Oscillator going from grossly oversold to overbought as it has with weak breadth. You don't see breadth positive for 13 of 15 trading days if the market is weak, do you?
This means the Cumulative advance/decline line has been quite strong. Back in September I complained constantly that breadth was not keeping up with the S&P. On the chart below breadth is on the top and the S&P is on the bottom. The entire month of September saw lower highs and lower lows while the S&P made higher lows and higher highs (red lines on the chart).
Now we have a situation where the S&P is almost 130 points lower than it was in early November and early December (green lines) and yet breadth has now taken out the early December high and is closing in on the early November (and mid October) highs. The red lines are negative divergences. The green lines are positive ones.
If breadth begins to weaken will see it on the chart. In fact take a look at the chart of the small caps relative to the large caps. Coming off the lows the small caps soared relative to large caps. However in the last week, while the Russell 2000 has continued upward the S&P has begun to catch up. In other words, the ratio of IWM to SPY (small caps to large caps) has not made a higher high in a week.
Notice near the low it had stopped making lower lows the day before the market made its low (blue line). Also notice that the trend in the ratio was lower the entire summer; it peaked in June but that downward trend was firmly in place as the S&P made its high in early October.
This little sideways action might just be a consolidation but I will continue to monitor it since if it turns down and starts making lower lows breadth is very likely to follow. I still think sentiment, while no longer super bearish as it was, is not yet to the point I'd call it giddy. I'd call it in the process of shifting.
