Equities Running Out Of Breadth?

By Rohan Clarke, Data Diary

Now isn’t that is a tagline to make an old media mogul smile – if they were of a mind to do so of course…

Consider the following chart of the NYSE McClennan Summation Index.

For the uninitiated, the summation index is a measure of market breadth. It looks at the number of stocks going up as against the number of stocks going down and, to put that figure in context, looks at how the net result is moving over time. As such, it is a reasonable indicator of how capital flows are being distributed through the market. (For a fuller explanation, refer to McClennan publications here.)

So to the chart above, the summation index has been struggling to regain even its late 2010 highs and in doing so has been defining a bearish divergence as the NYSE index has been stretching to new heights. This suggests that the market has been gaining ground on the backs of fewer and fewer stocks.  We could interpret this as more and more stocks are bumping up against valuation constraints – or put another way, valuation multiples can only move so far ahead of earnings growth.

Even with $50bn in POMO purchases scheduled into the end of January, a few days of heavier volume selling could well tip the summation index back towards bearish territory. We’ll see how it behaves assuming the selloff continues – being alert to any positive divergence (ie. lower NYSE index with the summation index turning higher) as a sign that buying has kicked in. Bigger picture though this indicator is suggesting that the internals of this market aren’t all that healthy.

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by Andrew Wilkinson, Senior Market Analyst at Interactive Brokers

Read more at The Pragmatic Capitalist