An Introduction to the Breadth Index (Thrust), Plus on Watch for 500+ New Lows this Week

NYSE TICK action remained negative Friday. TICKscore settled at -12,
cumulative TICK -62,600. Neither indicator is showing signs of waning downside
momentum as institutions have remained persistent sellers.

Friday’s intraday high was a good 2% below Thursday’s high. Despite this, new
52-week highs still managed to expand. More often than not, this type of
action leads to a higher S&P two sessions later (see my April 14th column for
a recent discussion). Keep in mind, however, that the recent failed McClellan
buy signal suggests there will be more downside, indicating a short-term
bounce early this week probably won’t stick.

Breadth was negative by nearly a 2:1 margin, sending the Breadth Index into
market oversold territory. This indicator, also known as Breadth Thrust, is
calculated identically to the New High-Low Index except that the number of new
highs is replaced by the number of advancers, and the number of new lows is
replaced by the number of decliners (see my August 8th column from last year
for details on the New High-Low Index.) The Breadth Index is therefore a 10-
day moving average of advancers / (advancers + decliners). As of Friday, the
moving average just dipped below .40, signaling the market is entering
oversold territory. Note from the long-term chart that 40% has consistently
represented an extreme reading. However, buying the S&P on a break of the 40%
level isn’t a consistently winning strategy, at least over the short-term.
I’ll discuss a pattern that has been effective in an upcoming column (this
chart will also be updated daily in the charting section of the site beginning
Monday).

This past week marked the fifth lower high on the S&P500 weekly chart, a sign
that selling pressure is most likely nearing an intermediate-term exhaustion
point. In 23 out of 26 separate cases of five lower weekly highs since 1970,
the S&P closed at a higher level 3-4 weeks later, significantly better than
the 67% at-any-time odds for a higher weekly S&P 3-4 weeks later (see my June
22nd column for the track record). This suggests further downside this coming
week could ultimately turn into a buying opportunity. One scenario that could
play out is a clean violation of the March lows, setting up a panicky selloff
as new lows are ‘confirmed’. The OEX and Dow have already confirmed, but the
all-important S&P500 is what most money managers are watching. It’s less than
1% away.

Noteworthy that the number of new 52-week lows on the NYSE jumped to 497 on
Friday. When the number of issues on the NYSE hits 500 or more, it’s a sign of
climactic selling pressure – a final washout prior to an intermediate bottom
being formed. Note from the long-term chart that the 500 level has
consistently represented an extreme reading throughout the last 30+ years.
Since 1975, there have been a total of 27 separate sessions in which new 52-
week lows on the NYSE hit or exceeded 500, all of which are noted in the table
below along with the S&P’s performance over the next three weeks. Note that in
the majority of cases, the surge in new lows coincided with an intermediate-
term bottoming phase…

Number of New 52-week Lows on the NYSE Equals 500+
03/17/08 759 New Lows… S&P +7.0% three weeks later
01/18/08 625 New Lows… S&P +1.1% three weeks later
01/09/08 709 New Lows… S&P -2.2% three weeks later (*)
01/04/08 539 New Lows… S&P -4.1% three weeks later (*)
11/19/07 565 New Lows… S&P +3.1% three weeks later
11/08/07 505 New Lows… S&P +0.4% three weeks later
08/15/07 717 New Lows… S&P +5.1% three weeks later
08/06/07 688 New Lows… S&P -0.1% three weeks later
08/01/07 522 New Lows… S&P -0.1% three weeks later
07/26/07 828 New Lows… S&P -4.8% three weeks later (*)
05/07/04 706 New Lows… S&P +2.0% three weeks later
10/09/02 604 New Lows… S&P +14.7% three weeks later
07/22/02 513 New Lows… S&P +10.2% three weeks later
09/19/01 539 New Lows… S&P +6.4% three weeks later
09/17/01 536 New Lows… S&P +2.3% three weeks later
12/14/99 565 New Lows… S&P -0.1% three weeks later
10/15/99 500 New Lows… S&P +9.9% three weeks later
10/07/98 535 New Lows… S&P +10.0% three weeks later
09/10/98 515 New Lows… S&P +0.6% three weeks later
08/26/98 575 New Lows… S&P -6.0% three weeks later (*)
08/04/98 541 New Lows… S&P +1.9% three weeks later
04/04/94 637 New Lows… S&P +3.1% three weeks later
08/23/90 711 New Lows… S&P +3.2% three weeks later
10/19/87 1068 New Lows… S&P +8.1% three weeks later
09/28/81 590 New Lows… S&P +3.0% three weeks later
03/27/80 714 New Lows… S&P +2.4% three weeks later
10/30/78 583 New Lows… S&P +0.2% three weeks later

Seventeen times the S&P was trading up 1% or more three weeks later. Only four
times was the S&P down 1% or more three weeks later. We didn’t quite top 500
on Friday, but it could very well happen sometime this coming week. If & when
it does, it would tend to reinforce the positive intermediate-term
implications from the ‘five lower highs’ on the weekly S&P.

Categories : Archived EOD Commentary, End-of-Day Commentary

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