A look at the advance/decline and the % of stocks above their 40-day moving average – July 19, 2021
T2108 T2100
I want to look at breadth here. First of all, expectation management, I’m not going to give you a trade today. I am just going to talk for a couple of minutes, not that long because there is not a whole lot to say.
This black line, that is the percentage of stocks that are above their 40-day moving average. Typically, during uptrends in the market, the SPY is the red line, you want to see a large percentage of stocks above their 40.
Now, over the last year or so this has kind of gradually been drifting lower overall but you still see these big spikes. You will see these spikes or these moves where breadth is horrible, everything sells off, and then it comes back and that coincides with this, a move higher in stock.
The same thing here, T2108, the percentage of stocks above their 40, falls down, moves up the S&P, falls down, moves up. You see this time and time again. A big sell-off here, a rebound here. Guess what? A big sell-off here, rebound here, huge here. So you see the pattern.
So here’s my question, from where this is right now, what are you thinking? Are you thinking it’s going to keep falling and then rebound, like it bounces off of the floor and the S&P keeps falling? I would say, no, I don’t think so. I would say that we are probably going to get some kind of a rebound tomorrow in the S&P ( INDEXSP: .INX ) and in the breadth indicator. So that’s the good news.
The bottom line is, if you didn’t sell today then you are hanging onto something. The good news is you will probably get a higher price tomorrow, and that’s a good thing. But longer-term it does just feel like the S&P ( INDEXSP: .INX ) and the broader market just needs to correct a little bit more.
So what I would be doing is, be mindful that the S&P ( INDEXSP: .INX ) takes a big spike down and this percent of stocks above the 40-day moving average takes a big spike down and then it rallies back up. But the S&P ( INDEXSP: .INX ) doesn’t necessarily have to keep going, and going, and going. At some point, this big downtrend in breadth really matters. And so what I would be looking for is this kind of move up and then this kind of move lower. That’s what I am looking at anyway.
And then the Advance / Decline (T2100), this is in kind of a little different situation, where it has been drifting lower. You will see kind of a double bottom here, if you are keeping track of that kind of stuff and then it finally broke through just over the last couple of days, the S&P down as well. So while you get higher highs here in the S&P ( INDEXSP: .INX ,) I’ve just drawn the line there, you are getting a lower high here in the Advance / Decline Line.
So all in all, it just feels to me like this market is really, really unhealthy. Maybe it’s got COVID, I don’t know. But it does just seem like the market is pretty unhealthy. And so I am pulling back, I don’t have anything in my trading account right now. If I did it would be a select few stocks but for various reasons, I don’t. But I think that on the sidelines is a really good place to watch the action because it feels a little bit like a bloodbath. I remember watching Gladiator and if I was back there in those times I would have definitely preferred being in the stands than down there in the arena trying to keep from getting my head cut off, so don’t be that guy.
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