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Short-Term Breadth Sentiment Weakens

Summary

Long-term market Breadth sentiment is Bullish, yet, it weakens especially in the Small Cap market sector

Short-term market Breadth sentiment weakened to the point when a market correction could be expected.

Market Breadth charts

In our previous weekly market Breadth report on July 30th of 2017 (Market Breadth Sentiment), we mentioned:

"In summary, the Breadth sentiment favors side-way and bullish trading for the coming week"

Past week the market indexes spent in the narrow side-way with positive bios trend. As of now, we have following long-term Breadth numbers:

71% of the S&P 500 index listed stocks are bullish - Bullish Sentiment;
80% of the DJI index listed stocks are bullish - Bullish Sentiment;
79% of the NASDAQ 100 index listed stocks are bullish - Bullish Sentiment;
59% of the Russell 2000 index listed stocks are bullish - Bullish Sentiment;
60% of the NYSE index listed stocks are bullish - Bullish Sentiment.
Source:  https://www.marketvolume.com/advance_decline/

There are not a lot of action when it comes to the long-term market sentiment. The same as before - the long-term Bulls are in charge. However, it is recommended to check the sentiment on the regular basis to see whether trend is strong or weak.

So far, the Bulls are strong, however, for two weeks in a row, we see a decline in the number of the Bullish stocks on the Russell 2000 and NYSE Composite indexes.

From the chart below, we may say that the Russell 200 index is in a correction. The investors are abandoning Small cap market sector slowly but steady. Small Cap sector is usually more sensitive to the changes in the market sentiment. When the investors start losing their confidence in the market, Small Cap stocks are the first to be removed from their portfolios. In such periods the market relays heavily on the Large Cap stocks and should a weakness spread over the Large Cap stocks, we may face stronger than expected reversal down.

Last time we witnessed signs of weakness on the Russell 2000 index in May of 2017. At that time, the Nasdaq 100 stocks held the market from a deep correction. Now, the DJI index helps the market to stay at the top. Still, we have to monitor the numbers, as weakness in the Russell 2000 index reveals that the market is vulnerable at this moment.

Another point worth mentioning is that Dow Jones Transport lost more than 5% while the Dow Jones Industrial was making new historical highs. These DOW indexes are usually move along-side and such divergence is considered as a bearish sign.

To estimate what we may expect in coming days it is recommended to take a deeper look at the S&P 500 shorter-term Breadth sentiment and compare it to what we had before. As of now

349 stocks are above their 200-day SMAs - down but still Bullish,
319 stocks are above their 120-day SMAs - down but still Bullish,
283stocks are above their 50-day SMAs - down and turned into weak Bullish,
240 stocks are above their 20-day SMAs - down and turned into weak Bearish.
Source: https://www.marketvolume.com/stocks/select.asp?s=technical

As you may see, while the S&P 500 has been trending side-way, more of its constituents tuned Bearish. This signals increasing odds of a correctional move down and bearish sentiment for this and coming week. While short-term market Breadth sentiment is bearish, there are several positive points:

  • Long-term Bulls are strong - should we have a reversal down on the S&P 500, the long-term Bulls, most likely, will use it as an opportunity to buy;
  • We are entering a summer vacation season of trading on low volume and low volatility - even we face a market correction, it should not be a deep.

Market Breadth Charts (source: https://www.marketvolume.com/technicalanalysis/studies_advance_decline.asp):




Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.