Narrowing Breadth as Stocks Gyrate Near Highs
Key points
- Contrary to traditional technical analysis dogma, contracting market breadth while the broader index consolidates near its highs is not inherently a bearish signal.
- When fewer than 15% of S&P 500 stocks trade near their one-year highs while the index itself hovers within 5% of a five-year high, historical data reveals a bullish setup, boasting a 75% win rate over the following month.
- Despite this strong quantitative edge, investors must remain vigilant and employ strict stop-loss strategies to navigate looming September seasonal headwinds and sticky core inflation driven by geopolitical tensions.
Narrowing Breadth as Stocks Gyrate Near Highs
For those steeped in technical analysis textbooks, we are told that the market is strongest when participation is broad, and when breadth contracts, trouble is on the horizon.
Unfortunately, much of the conventional wisdom in this field is built on pretty pictures, unfounded rules of thumb, and cherry-picked examples. Almost all classic texts lack consistent predictive power.
The idea that contracting breadth following a massive stock market rally is a bearish signal is yet another false assumption.
This is indeed a topic of discussion right now, as the S&P 500 is gyrating in a consolidation range after breaking out to new highs. Although the pullback range has been minor, inde