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Stock market's abrupt reversal

Troy Bombardia
2020-06-12
Thursday's fierce selloff led to an abrupt reversal in many breadth indicators.

The stock market's rally before Thursday was quite powerful, triggering extremes in various sentiment and breadth indicators. Many of these breadth indicators did a 180 when the stock market crashed on Thursday.

The selloff led more than 38% of S&P 500 stocks to trigger a MACD sell signal, which implies that a significant number of stocks are rolling over.

Similar large spikes led to further S&P pullbacks and more volatility, particularly in recent years.

Most of the historical cases occurred while the S&P was rallying above its 200 dma and just started to roll over. For the few that occurred while the S&P was in a downtrend (below its 200 dma), this was more of a bearish factor over the next 2 weeks:

We can note the same behavior in other U.S. indices, such as the NASDAQ 100. More than 38% of NASDAQ 100 members have witnessed a MACD sell signal in the past 10 days:

Historically, this was more bearish than random for the NASDAQ 100 over the next 3 months. This was moreso true during the 2000-2002 bear market:

And 31% of NASDAQ Composite members have witnessed a MACD sell signal in the past 10 days:

This wasn't consistently bearish for the NASDAQ Composite on any time frame:

The sharp selloff has pushed more than 98% of the S&P's members below their 10 dma (short term moving average):

This was mostly bullish for stocks over the next year, although that's primarily because all of the historical cases occurred from the 2008 bear market - present. This comes to show that breadth readings are becoming more and more extreme, possibly due to the rising popularity of ETFs and the echo-chamber in many online trading rooms (e.g. Twitter, Reddit, Youtube).

From a slightly different perspective, 98% of NYSE volume flowed into issues that fell:

When this happened in the past, the S&P could pullback further in the short term. But this was mostly bullish for stocks over the next 2-6 months:

Similarly, 97% of NYSE issues fell:

The few other times this happened in the past all saw the S&P rally over the next 2-3 months, even if stocks did fall further in the short term:

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