Gordon Scott

Gordon Scott has been an active investor and has provided education to individual traders and investors for over 20 years. He is a licensed broker, an active trader, and proprietary day trader.

Gordon teaches the Investopedia Academy's Penny Stock Trading course, but his background in instruction is broad and deep. From 2013 to 2018 he was the Managing Director of the Chartered Market Technician (CMT) designation's examination program for the CMT Association (cmtassociation.org). The CMT is a globally-accepted technical analysis credential in the financial industry.

Gordon has over 15 years experience as a trading coach. For four years, he was the content manager at Investools, which publishes research and commentary on trading strategies. Gordon developed an online curriculum and oversaw its growth during the Thinkorswim and TD Ameritrade mergers.

Gordon's career also includes 10-years with International Business Machines Corporation (IBM), where he developed instructional materials and business process refinement. He also was an Adjunct Instructor at Brigham Young University–Organizational Strategy and Leadership department.

Gordon is co-author of the book, Invest to Win (McGraw-Hill 2013), with Toni Turner. The book provides insight on investing approaches and in managing a bullish portfolio known as the GainsMaster Investing method.

Extreme Breadth Readings Say Short-Term Bearish, Long-Term Bullish For S&P 500 And Nasdaq 100

By late October 2023, the market conditions were dire indeed. The S&P 500 had broken below its 200-day moving average for the first time since March. Only 10% of S&P 500 members remained above their 50-day moving average, meaning a full 90% were below this key short-term barometer.

What a change we’ve seen in the last six weeks!

We finished last week with around 88% of SPX names now above their 50-day moving average, after briefly touching the 90% level on Wednesday. The S&P 500 has now made another new high for the year, ending the week just above 4700. That’s right, we’re only about 2% below all-time highs!

So are the excessively positive breadth readings in mid-December a good thing or a bad thing for stocks? The reality is it’s a little of both. 

Reviewing the percent of stocks above their 50-day moving average, it seems clear that have reached an upside extreme. This indicator rarely touches the 90% level, but it’s actually done so three other times in the last 18 months.

The last time we saw this extreme bullish reading was in July, as the SPX was testing the 4600 level. The next three months saw a steady decline for stocks, ending in the late October low around 4100.

Back in late November 2022, the indicator pushed above 90% as the S&P 500 experienced its initial upward swing after the October 2022 low. The benchmark pulled back for about four weeks before continuing to a new swing high in February.

The third time we witnessed this level of positive breadth was back in August 2022, as the S&P was testing its 200-day moving average from below. This was during the meat of the 2022 bear market phase, so this extremely positive reading was quite unusual.  Sure enough, we had about an eight-week decline into the October low soon after.

These three declines, of 10%, 8%, and 17%, respectively, show that breadth is extremely bullish, the short-term picture actually becomes bearish. It’s all about the market adjusting lower before continuing the previous trend.

But remember, these were all short-term declines of around four to 12 weeks. What about the long-term implications for these overbought patterns?

It turns out that the returns 6-12 months after these signals are actually quite constructive. So while the short-term implications are that a pullback is imminent, the long-term indication is more that the uptrend is alive and well.

We’re now bringing in twenty years of daily data, with the bottom panel showing the percent of S&P 500 stocks above their 50-day moving average. I’ve highlighted in pink any time this indicator has pushed above the key 90% level, and have also included dashed vertical lines for each indication.

You’ll notice that what we discussed above about short-term implications generally holds true over multiple cycles. We often see a pullback soon after the 90% level is reached, or at the very least a pause in the uptrend. 

But now look at what happens about 6-12 months after these signals have occurred. In pretty much every instance, you’ll see that the market has fully recovered after the pullback, often reaching new highs within a year.

Now to be clear, a six-month decline is no small issue. Some would say those can be “career busting declines” if you’re on the wrong side of them!  But it should be reassuring as you review this period in market history that these signals have eventually had a very happy ending for equity investors.

We are currently in the seasonally strongest part of the year, with November and December often experiencing strong returns for stocks. And in a pre-election year like 2023, that seasonal tendency certainly appears to be holding true.

Just last week, we saw additional economic data suggesting that the Fed’s efforts to taper inflation appear to have been working. Fed Chair Powell’s comments on Wednesday led to the latest up move in this bullish fourth quarter, as investors price in the likelihood that a “soft landing” is more and more a likely outcome.

There remain plenty of risks for equities into Q1 2024, including interest rates pushing back to the upside, volatility popping higher, and the US Dollar returning to its former role as a “wrecking ball for risk assets” as we saw in 2022. But given the strong market breadth readings in mid-December, I would say that the long-term picture for stocks appears to be as strong as ever.

RR#6, Dave

PS- Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT Chief Market Strategist StockCharts.com

David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis.  He is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness.  He is a Past President of the Chartered Market Technician (CMT) Association and currently serves on the CMT Curriculum and Test Committee.  David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York.  You can follow his thinking at MarketMisbehavior.com, where he explores the relationship between behavioral psychology and the financial markets.  

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Bruce Powers

Bruce Powers, CMT has been involved in the financial markets for over 20 years, as an analyst, trader, educator, and writer. Most recently he was Head of Trading Strategy Development at Relentless 13 Capital covering cryptocurrencies and continues as Corporate Advisor to Chronos Futures, a systematic trading strategy developer. Previously, he was a partner at Pattern to Profit, a research firm utilizing unique market geometry analysis of financial markets. He was also Co-chair and Co-founder of the Dubai Chapter of the CMT Association.

In addition, Bruce was Chief Technical Analyst at MarketsToday.net in Dubai, a Middle East stock market portal. For nine years Bruce wrote a weekly technical analysis column on the UAE stock markets for the Gulf News newspaper, the leading English newspaper in the Middle East. He has appeared over 150 times on TV business news shows. Bruce is a CMT® charter holder, a member of the CMT Association, and earned his MBA in Finance from the Eller College of Management, University of Arizona, USA.