Under the surface of the market we have this beautiful analytical toolbox called “breadth”. With breadth, we as market participants can obtain a great understanding of the environment we are currently in, thus giving us the ability to align scenario expectations for our specific portfolio trades and risk assessments. Those who pay attention to market breadth know that the environment has been atrocious for what we as technicians would call, “a healthy narrative from breadth”. And quite frankly, we haven’t seen a healthy narrative, from a broad approach for quite some time. Yes, there absolutely has been “thrust” style bullish days where we even see some counter trend type moves (ie. mid March) but the overall narrative has been and continues to be one of longer-term deterioration.                    For illustrative purposes only

For example, in the above chart, we have a very simple and straightforward breadth tool measuring advancing issues minus declining issues for the NASDAQ+NYSE exchanges (top chart). The green shaded coloring displays when the trend of this measure is above the 50wk EMA and red when it crosses below. We have seen this breadth measure essentially give an “unhealthy” breadth signal since mid January. Wrapping around on our main point from the first paragraph, we can use readings from this measure not so much as a signal (although some may) but more as an environmental tool for expectations, especially when we have more of a discretionary execution system, such as our Adaptiv models. Looking forward, we want to see this 14.5k area hold, otherwise, the unhealthy market likely gets more unhealthy under the surface.    Another breadth measure we like to utilize comes from the cumulative S&P 1500 new highs – new lows %, paired with a PPO oscillator below. This measure also peaked in January with a continued push lower in PPO measure (momentum). Again, it’s not so much about the signal here as it is about the underlying expectations for the market.                                                                                For illustrative purposes only

We like to use the analogy of taking your car for a drive in a snowstorm, it doesn’t guarantee the event of a crash or accident, but the probabilities of the drive being stressful and volatile are certainly heightened.    So, we have given a couple examples of broad breadth measures that have and continue to show risk off environments for the broad market. The next question becomes, what do we want to see from breadth to start giving us clues the snowstorm may be subsiding? Well for starters, we can look at something like stocks above specific moving averages. More specifically, with the first chart below we can analyze the amount of small cap stocks above the 50 day EMA as well as the 200 day EMA. Notice the levels at which we are fast approaching, <15%. This tells us ~85% of small cap stocks are below their 50 and 200 day EMA’s, respectively. Now for us, it’s not so much about this measure making its first move through the 15% mark, but when this measure starts to push back above 15%, that is the environment we will take much more seriously in terms of small caps trying to improve themselves under the surface. The same situation can be said of the 200 day EMA.                                                             For illustrative purposes only

Right now, a similar narrative can be said about the NASDAQ. However, in this instance, we see all major percentages below 15%. Not a great look at all but the thrust style behavior we would be looking for occurs when these stocks above percentages cross back above 15%. When and if that were to occur, we would be in the narrative camp of the snowstorm subsiding and heading out for our hypothetical road trip again.                                                           For illustrative purposes only

It is important to remember that breadth is more of a narrative and environment gauge for us than say a hard and fast signal. As with anything, analysis is only a small piece of the puzzle, execution, risk management and managing expectations remain the elevated pieces in which “ok” market participants can make the leap for “great” market participants.    

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Client First Investment Management LLC is a Registered Investment Advisor This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Client First Investment Management LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Client First Investment Management LLC​ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.