Weekly Update: A Picture is Worth a Thousand Words

Ross Givens on October 6, 2023

Good evening, and welcome to this week’s edition of Stealth Trades!

When it comes to the stock market, I find that pictures, i.e. charts and data, are more valuable than people’s opinions about what could or should happen.

We all have inherent biases based on our own experiences and point of view – myself included. When I force myself to ignore everything but the data in front of me, my investing results tend to be better.

So, in this week’s update, I want to stick to the raw data. Here is what I am seeing…

The chart below is something I included in last week’s email, but I am showing it again for those who missed it.

It compares the year-to-date performance of the 7 largest stocks in the S&P 500 (green line) with the other 493 (black line).

Meta, Apple, Amazon, Alphabet, Nvidia, Microsoft and Tesla all delivered huge gains – propelling the Nasdaq up 48% to start the year. But without the “Super 7” the market was basically flat this year.

In other words, this has been a “fake” bull market seen only in the market cap-weighted indexes.

Another metric I like to watch is the percentage of stocks above their respective 50 and 200-day moving averages. This gives a clear view of market participation by revealing how much of the market is in short and long-term uptrends.

The chart above highlights the deterioration that has taken place beneath the surface over the last couple months.

As of today, only 32% of stocks are above their 200-day moving average and 17% are above their 50-day.

Translation?

The majority of the market is in decline, regardless of what the indexes look like.

Market participation or “breadth” as it is often referred is a big part of my analysis. The chart below shows the action leading up to last year’s bear market.

As I discussed many times in these weekly updates in late 2021, participation was steadily declining. Even though the S&P 500 index was advancing, most stocks were in decline. By the end of the year, only 32% of stocks were in long-term uptrends.

So, the 2022 bear market was not much of a surprise.

When looking at these breadth readings, the trend is more important than the reading. In other words, I do not care whether 30% of stocks are above their moving average or 70%. What is important is whether that number is rising or falling.

And right now, those numbers are still falling. Until I see them improve, I remain cautious on the general market and holding ample cash.

Lastly, let’s look at the net new highs and lows.

The chart below calculates how many stocks made new highs and how many made new lows across the NYSE and Nasdaq exchanges.

The net reading is then plotted as a red or green bar. A green bar means more stocks made new highs than new lows. A red one shows the opposite.

In a healthy market, we should see more stocks making new highs. In the last bull market from April 2020 to November 2021, that is exactly what we saw (see below).

We are seeing the opposite trend right now.

Together, these internal breadth indicators do not paint a rosy picture. Markets are fluid, and this could change at any time. In fact, I expect the bull market to resume before the end of the year.

But if you are trying to time your buys in alignment with the market internals, the verdict is clear – wait for clearer skies.

My analyst Jean and I have been working on an indicator that combines this data to generate a comprehensive market health reading. We are currently testing a beta version, and initial results look promising.

More to come on that in the future.

In the meantime, try your best to think independently… to ignore the headlines and personal biases that influence your expectations for the market.

It is easy to be swayed in one direction by the market action of a single day or week. Today, for example all the major indexes are up over 1% each. It looks like things are turning around.

Yet stocks made new lows at 10x the rate they made new highs today.