As S&P 500 hits new record, three indicators point to a pullback

Published Fri, Jan 19 202412:34 PM ESTUpdated Fri, Jan 19 20241:20 PM EST

The S & P 500 on Friday surpassed its all-time high from January 2022. However, a review of three key market breadth indicators suggests an increased likelihood of a tactical pullback for stocks. After reaching the 4,700 level in mid-December, the S & P 500 has essentially been rangebound between 4,700 and 4,800. A break below that 4,700 level would mean a new swing low for the benchmark and would certainly cause me to revisit some potential downside support levels. But as the S & P is testing new all-time highs, what can breadth indicators tell us about conditions "under the hood" of the broad market averages? While the S & P 500 has remained rangebound, the NYSE advance-decline line (second panel) has already broken to a new swing low. Advance-decline lines are constructed by creating a running total of daily advance-decline readings, allowing us to compare the trend in price action to the trend in market breadth. In other words, how much are the individual stocks participating in the overall market trend? Many stocks already breaking down This recent downtrend in the advance-decline line suggests that many individual names are already beginning to trend lower, even though the S & P 500 and Nasdaq 100 have so far been able to hold price support. This could indicate that investors are rotating to a more defensive positioning, taking risk off the table to ride out this period of instability. The next panel shows the percentage of S & P 500 members that are trading above their 50-day moving average. This indicator peaked just above 90% at the end of December and has now moved down to around 73%. A brief glance to the left will show that a similar pattern has been observed right around the market peaks in July 2023, December 2022, and August 2022. What does it tell us when this indicator drops around 20% in just a few weeks? Basically, stocks are breaking down to the point that they are unable to hold this crucial first level of support. So as the S & P is testing new highs, more and more individual stocks appear to already be in pullback mode. Finally, we have the S & P 500 Bullish Percent Index, which reveals the percentage of S & P 500 members that are currently showing a bullish signal on their point & figure charts. This breadth indicator reached just above 80% at the end of last year but has now pushed down to around 69%. This tends to happen at the at the end of a market upswing, as some individual names start to break down before the benchmarks show any real signs of weakness. Seasonal trouble too Notably, this turn lower in market breadth is happening during a normal period of seasonal weakness. The first quarter of an election year is usually the weakest three-month stretch, as a quick review of the last five election years will reveal. Going back to 2004, January has only been up 40% of the time with an average return of -0.9%. We've observed similar results in February and March, before stronger average returns in the spring and summer months. So the recent drop in market breadth comes at a time of the year when we have often experienced price weakness for stocks. The long-term market trend appears strong to me, and I do believe that the S & P 500 will push above 5,000 in 2024. I'd need to see a breakdown below S & P 500 4,450 before I'd begin to really question that thesis. But a quick review of these three market breadth indicators suggests that we may see further choppiness before that long-term uptrend resumes. -David Keller https://www.marketmisbehavior.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.