Sep 9, 2010

September Market Breadth

Perfect measure for the market breadth can be considered percent of stocks above 50-day moving average compared to the S&P500 index move. As most efficient things are simple it is simple. By showing number of stocks above its 50 day MA we can get an aggregate view of market condition - overbought or oversold at given time. As you can see on the picture whenever the indicator (green line) reaches overbought area, which is determined by +1SD (standard deviation) it is showing sell signal and soon after the market falls. We have same configuration but with buying signal when it reach -1SD area. Values over/under 1SD are showing extreme market conditions and are even stronger signals.

To prove the accuracy of the indicator let us turn back to history. During last two years there’s been many buy signals. During bullish market after March 2009 repeated pattern occurred. After reaching -1SD value the indicator sharply turns back and reaches overbought area than staying there around 3 months before significant drop (market correction). During bullish market the correction is short which is visible on the chart. However last market selloff showed buy sign similar to this seen at the end of 2009. This could suggest that we might be entering new bear market. According to my observations this is not the case for the moment, considering recent market consolidation.

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