3 Must-See Charts on Stock Market Breadth

Very few stocks are trading near their 52-week high

Senior Quantitative Analyst
Apr 25, 2018 at 7:15 AM
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Market breadth hasn’t been on my radar lately, but my colleague, Schaeffer's Quantitative Analyst Chris Prybal, sent me a chart recently that piqued my interest. Analyzing market breadth gives you an idea about the number of individual stocks that are doing well or not so well. Investors often look at market breadth as an indicator of underlying strength or weakness based on where a broad market index is trading.

For example, if the S&P 500 Index (SPX) is hitting new highs while market breadth shows a very small number of stocks are coincidentally hitting highs, then that’s a sign of underlying weakness in the market. Below, I look at market breadth in several ways to see how individual stocks have performed compared to the S&P 500 Index.

Breadth Reading Sinks to Zero

This first chart is the one Prybal pointed out to me. It shows the difference in the percentage of stocks each week making a 52-week high or low (it uses a four-week average to smooth the graph). It recently hit zero, which garnered our attention.

In one way, the chart below is somewhat encouraging. The recent pullback is steeper and longer lasting than some of the earlier ones that sent this indicator to 0%. For example, at the end of last week, the S&P 500 sat at 7% off the highs. In November 2016, the indicator essentially touched zero on a pullback of less than 5%.

I’ll skip over the pullback that bottomed in early 2016 since it was much more dramatic than we’ve seen so far. The two pullbacks before that, which sent the high/low difference to 0%, occurred in October 2014 and June 2012. Those pullbacks were 6.2% and 6.6%, respectively.

In other words, despite the current pullback being harsher than some of the other ones over the past few years, the number of new lows just recently surpassed the number of new highs. Furthermore, the four-week average of the high/low difference moved back above 0% last week.

spx stock breadth

This next chart shows the four-week average of the number of stocks making a new 52-week high. Ignoring that dramatic pullback from early 2016, the only time fewer stocks were making a 52-week high was October 2014.

So, the chart above showed your odds of holding a stock at its high was just as good as holding one at its low. The chart below leads to the conclusion that the odds of holding a stock either at its low or high is rather low. I guess that can be expected with the S&P 500 sitting 7% off its high, but still well off its 52-week low.

spx stocks at new high

Measuring Current Market Breadth

I think this is an interesting way to gauge breadth. It tells us how far the average stock is away from its 52-week high based on how far the S&P 500 is from its 52-week high. So on the X-axis, it shows the 52-week return of the S&P 500. The Y-axis shows how far the average stock is away from its 52-week high.

The red dot shows the most recent data point. It shows the S&P 500 is up 13.7% over the past year, as of last week, while the average stock is 15.7% away from its 52-week high. The black trendline is where you would expect the red dot to be based on the data since 2012. It’s showing the average stock has pulled back a little more than to be expected, given the 52-week return of the index. It’s not anywhere near an extreme, as you can see, but investors following breadth may see this as a sign of some underlying weakness.

S&P scatter plot


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