The Most Important Indicator Right Now
The S&P 500 fell nearly 7% from its all-time high at the beginning of August. Since then, the index has been chopping sideways as market participants anxiously try to figure out which direction this consolidation will resolve. In environments like this, it can be helpful to analyze market internals, like breadth, to gauge the overall health of the market. For those of you unfamiliar, breadth refers to the level of participation from the individual components within an index. There are several popular indicators that Technicians use to measure breadth. Right now, one breadth indicator, in particular, seems to be in focus; the percentage of stocks above their 200-day moving average.
I like this indicator because it's pretty straight forward. It measures the percentage of stocks within an index (S&P 500 in this case) that are trading above their respective 200-day moving averages. The 200-day moving average is commonly used to identify the direction of the trend. If a stock is trading above the 200-day moving average, it's often considered to be in an uptrend and vice-versa. Therefore, this indicator is essentially measuring the percentage of stocks within the S&P 500 that are in confirmed uptrends.
Below is an interesting tweet from Neil Blalock that we featured last week, in our Chart of the Day column. Neil points out that 50% is a critical threshold to watch on this indicator.
Two other respected Technicians, David Keller, and Ryan Detrick, also emphasized the importance of the 50% level in the tweets below. They add that we're getting dangerously close to falling below 50% now.
Bad things happen when this indicator falls below 50%. We recreated Neil's chart below and highlighted all the instances where it fell under 50%. As you can see, the two most substantial drawdowns in the past 5-years could've been mitigated if you had sold when the indicator fell below 50%.
It's interesting to see how the 50% level tends to act as support/resistance. When it falls below 50%, it usually stays below it for a while and has a hard time getting back above it. This phenomenon speaks to the fact that an individual stock often finds support/resistance at its 200-day moving average.
The good news is that the current reading is 55%, meaning over half the stocks in the S&P 500 are trending higher despite the recent pullback. Also, the S&P 500 as a whole is still trading above its 200-day moving average. It'll be essential to keep an eye on this indicator for clues as to where stocks are headed in the near-term. You can track this indicator on StockCharts.com using the symbol $SPXA200R. We'll be sure to monitor this and report back with any significant developments. As always, feel free to contact us with any questions.