S&P 500 – the “soldiers are deserting,” says Richard Russell

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Where breadth goes, the market usually follows,” goes an old market saying. Breadth indicators are useful tools to assess the inner workings of the market’s rallies or corrections, and are used to identify strength or weakness behind market moves, i.e. to assess how the bulls and the bears are exerting themselves.

Let’s consider one measure of stock market “internals”: The number of NYSE stocks trading above their respective 50-day moving averages has declined to 55% from more than 75% at the end of April (see top section of chart below). In order to be bullish about the secondary or intermediate trend, one would expect the majority of stocks to trade comfortable above the 50-day line. Although the indicator is back above 50 after a dip below this level a few days ago, the outlook for the intermediate trend has weakened over the past few weeks, but it is premature to cry “wolf”.

For a primary uptrend to be in place, the bulk of the index constituents also need to trade above their 200-day averages. The number at the moment is 76% – somewhat down from its early April high of 83%, but nevertheless still firmly in bullish territory.

Source: StockCharts.com

Richard Russell, 86-year old author of the Dow Theory Letters commented as follows on the deteriorating market breadth: “This is a bearish picture. The ‘soldiers’ are deserting even while the ‘generals’ continue to march forward. In a war, this would be a prelude to disaster. In the stock market, it may be the same.”

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