The market trend is strongest when most stocks are rallying and strong. In the past few weeks, most stocks are trading below their 200-day average.
Historically, this is a warning sign that the trend is weakening. It does not tell us when the market will roll over, but it does give investors a heads up!
Bad breadth can also be seen in the percentage of stocks making new 52-week highs versus 52-week lows.
In the strong market that developed out of the 2020 COVID-19 lows into the early 2022 highs, we started to see the number of stocks making new lows increase in the last stages of the rally.
Though back then, many stocks were still making new highs.
This time around, few stocks have made new highs in the past few weeks and many more stocks are making new lows.
Breadth analysis is a leading indicator, but the timing is not perfect. As long as forward based earnings outlooks remain strong, the market should be OK.
So when we turn to Q3 earnings period in a few weeks, it will be important for companies (beyond AI capex recipients), confirming the forward based guidance. If not, a 10 per cent or more decline in markets is likely. We think that is still a 2027 story, but sometimes objects in the rearview mirror are closer than they appear.
This does not mean you sell everything, it does not mean a major bear market, but it does suggest the forward based returns will be less than forecast and that investors should be prepared for some uncertainty.
