#44 S2N: Is Breadth Important?

Today’s Spotlight

We are still very near the all-time highs of the SP500. I wanted to look at how many of the SP500 stocks are trading above their 200-day moving average to get a sense of what % of the index is in a long term uptrend. The common belief is that the broader the breadth of a rally, the longer it is likely to last. In the chart below, you can see that 66% of the 500 stocks in the index are above their 200-day moving average. I placed a dotted line around its mean, which is 60%.

The above chart is what most analysts share, but very few actually provide statistical context around what it means for performance. I have produced a simplistic backtest of how you would perform holding the SP500 when more than 60% of its constituents are above their 200-day moving average and selling your holdings and being in cash when below 60%. The breadth indicator of the percentage of stocks above its 200-day moving average does not provide any signal as a market timer for the SP500, according to my analysis of its risk-adjusted returns. I am sure it provides some information that can form part of a more sophisticated trading system, but it is another case of an indicator on its own that is more noise to signal.

S2N Observations

Coffee futures are up 26% this month; I suspect this will impact household disposable income a lot more than the weight it reflects in the CPI basket.

Performance Review

As you can see with so much colour below, the markets are pretty wild at the moment.

To learn a bit more about the Z-Score, which I use for the colour signals, read this blog post.

Chart Gallery

The post #44 S2N: Is Breadth Important? appeared first on Signal2Noise.