The Nasdaq Breadth Indicator to Watch Now

Various market breadth indicators suggest the rally may be running on fumes

by Bernie Schaeffer

Published on Oct 15, 2019 at 8:48 AM

While technical warning signs for the stock market have taken something of a backseat to the daily parade of geopolitical headlines, concerns about market breadth have been bubbling under the surface for some time now. The percentage of S&P 500 Index (SPX) stocks trading above their 50-day moving averages has rebounded from recent lows, but remained south of the 50% threshold as of Friday afternoon. In fact, about a month ago, this indicator's own 50-day moving average completed a bearish cross with its 200-day counterpart for the first time since October 2018.

Similarly, the number of New York Stock Exchange (NYSE) securities hitting new 52-week highs has dwindled to around 143 -- down sharply from highs of 576 around early July. So, even as major equity indexes trade within striking distance of new record peaks, the underlying worry is that the weight of the rally is being shouldered by an increasingly slim number of equities, and may subsequently be on its "last legs."

With that context in mind, our focus this week is on the percentage of Nasdaq stocks trading above their 200-day moving averages -- a somewhat broader and more generous version of the S&P 50-day metric mentioned above. After a quick surge up to 55% recently, this metric has cratered all the way down to the upper 30s, with the majority of Nasdaq-listed names now trading on the south side of their 200-day moving averages.

And, as with the S&P indicator mentioned above, the percentage of Nasdaq stocks trading above their 200-day moving average has now broken below its own 200-day moving average, which hasn't happened since the late-May/early June lows. Furthermore, after tumbling below this trendline, the indicator was subsequently rejected at its 200-day moving average, and jolted lower again.

The break of the 200-day moving average here isn't necessarily devastating for the Nasdaq; in fact, this indicator has repeatedly bottomed in 2019 around the 35% neighborhood, which just happens to be a few notches below both its current level and the 200-day trendline. Previously, during the fourth-quarter 2018 sell-off, the 35% level is where this indicator found resistance on a couple of occasions before bottoming out.

However, it's worth pointing out that the most recent short interest data (for the period ended Oct. 1) showed short interest on Nasdaq-100 Index (NDX) components falling slightly to arrive in just the 17th percentile of its annual range. While the relatively low level of interest from bearish traders is "justified" by NDX's price action, given that it's trading within about 2% of its highs, that compares to S&P short interest levels in the 100th percentile of their annual range -- hinting at a potential dichotomy in investor sentiment toward tech stocks relative to the broader market.

So for those with the ambition to monitor equity breadth alongside the continuous daily stream of major market-moving headlines, we'd suggest keeping an eye on the 35% barrier for Nasdaq stocks trading above their 200-day. While the year-to-date chart action indicates a bounce from this level could reasonably be expected, the low level of short interest toward Nasdaq heavyweights means a break of this "floor" could precede a quick leg lower for stocks in the short term.

nasdaq stocks above 200-day moving average
Chart courtesy of StockCharts.com


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 13.


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