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Breadth Signals Bad News For The Bears

|About: SPDR S&P 500 Trust ETF (SPY)

Historically, as long as breadth in a bull market has remained strong, the next bear market has been delayed.

Defining strong breadth and examining market history reveals common occurrences.

Applying the results to today's market projects the likelihood of a bear market occurring soon.

There is no way to know for certain when the next bear market will occur. But there is a way to estimate the probability of a bear market not occurring within a certain period of time, using historical results with a simple breadth measure.

Perhaps the best single non-price-based indicator of a long running rising (i.e. bull) market's health is daily NYSE cumulative breadth. To compute this, simply subtract the number of declining issues from the number of advancing issues on the NYSE each day, and keep a running total of these daily differences. To keep it simple and avoid negative numbers, begin with a very large number such as 100,000.

I can't provide a chart of this cumulative breadth line, but in a bull market such a chart would show it rising as the S&P 500 is also rising. Initially, new highs would be reached in this line as the S&P 500 reaches new highs. As the bull matures, a warning sign is given when S&P reaches a new high but the cumulative breadth line does not.

Today one reads articles or comments in SA predicting (or hoping for) a drop of 20% or more in the S&P 500. How likely is that? As long as new highs in the line are occurring one can use market history to estimate the probability of such a decline.

Bear markets cause most issues to decline, which in turn will cause the cumulative breadth line to decline. Thus as a bull market is registering new cumulative breadth highs, if there is to be a bear market, there will come a day when the last such high occurs. I have examined the data since 1960 and discovered 1347 new highs in this breadth line. To determine which of those were the last in a sequence, I searched for 125 trading days (about 6 months) after each one and noted those after which there were no new highs. I found 20 such instances.

Then I looked to see how the S&P 500 had fared over the 63 trading days following each last high. Here are the results, using daily closes. The columns are:

- Date of last Cumulative breadth high

- Maximum drop from that date

- Number of days to maximum drop

- Gain or loss at 63 trading days

Date             Drop   Days Gain/loss


1961-05-17 -4.4 pct. 41 1.1 pct.

1963-05-31 -4.1 pct. 35 1.9 pct.

1965-05-06 -9.3 pct. 36 -4.6 pct.

1971-04-28 -7.3 pct. 63 -7.3 pct.

1975-07-15 -14.1 pct. 44 -6.4 pct.

1976-02-24 -3.0 pct. 7 -2.5 pct.

1977-07-22 -9.1 pct. 62 -8.9 pct.

1978-09-11 -13.5 pct. 46 -9.7 pct.

1980-09-19 -4.4 pct. 6 3.4 pct.

1983-06-16 -5.9 pct. 36 -2.8 pct.

1986-04-21 -4.9 pct. 19 -3.5 pct.

1987-03-23 -7.6 pct. 41 2.8 pct.

1989-08-08 -4.8 pct. 63 -4.8 pct.

1992-02-12 -5.4 pct. 39 -0.2 pct.

1994-02-02 -8.9 pct. 41 -6.4 pct.

1998-04-03 -4.1 pct. 49 3.1 pct.

2002-05-03 -25.7 pct. 55 -19.5 pct.

2007-06-04 -8.6 pct. 51 -4.2 pct.

2011-07-07 -18.8 pct. 61 -15.5 pct.

2015-04-24 -3.4 pct. 51 -1.8 pct.


avg. gain = -4.3 pct.

avg. max loss = -8.4 pct.

Note that there was only one drop of more than 20%. So a more realistic target is down 10% or more. The probability of such a drop within 3 months of the last new cumulative breadth high is 4/20 or 0.2.

But there were 1347 such new highs over those 58+ years. When one occurs, there is no way to know that it is the last one in a sequence. So the real probability is (4/1347) X 0.2, or 0.0006, virtually non-existent.

But, applying some common sense and historical tendencies, one might be able to guess the likelihood of a breadth line high being the last with a 50% accuracy. Then the probability of a 10% or greater drop within 63 days rises to 0.5 X 0.2, or 0.1.

But, maybe the 63-day interval is too short. Maybe we should go out to 6 months, or 9 months, or even longer. Yes, we could do that, and we would find more bear markets and a higher probabilty of a 10% or greater drop. But this would only strengthen the case that reaching a new cumulative breadth high is a very bad sign for those who are hoping for a bear market to begin soon. Using a longer interval would merely move out the expected time of the next bear market.

The last cumulative breadth high occurred on July 3. Every new high is more bad news for the bears.

Disclosure: I am/we are long IWM and Russell 2000 futures.