One of the things we look for in a healthy market is broad participation by many stocks. Gauges like the Bullish Percent Index, the number of stocks making new 52 week highs, and the percentage of stocks above their 200 day moving average are all good indicators of market breadth.
Recently the number of S&P 500 stocks above their 200 day moving average showed some promising signs. In the chart above, notice that stock above their 200 DMA did not confirm the move higher in the S&P 500 Index coming out of the June lows. From mid June till early August the chart traded sideways even though SPX was trending strongly upwards. The early move in price was against a wall of worry where many stocks lagged the market as a whole.
The sideways movement in the number of stocks participating strongly in the rally stayed low as market participants bought quality or safe stocks rather than a broad number of securities. It showed that people were still worried about the market rolling over into a deeper correction.
Recently the number of stocks above their 200 DMA broke out of the sideways consolidation. This occurred just as the S&P 500 Index broke above a major resistance point of 1400. The consolidation between 1422 and 1400 on SPX did not do damage to stocks above their 200 DMA. In short, a healthy pause in the market. That pause was followed by a strong up day that was confirmed by many stocks breaking their 200 DMAs. Currently, the percent of stocks above their 200 DMA is painting a similar pattern as the S&P 500 Index. This is very healthy as it signals a willingness to own a wider variety of stocks by money managers and broad participation in the rally.
On a longer time frame, price on SPX is diverging from the percent of stocks participating in the rally. Price is has moved above the March highs, but the number of stocks above their 200 DMA has not. This can be both bad or good. On the bad side, it could signal that this rally is nearing an end. On the other hand, the number of stocks that haven’t participated could provide fuel for the next leg higher. We’ll be watching this indicator if the market rallies to see if it continues to rise with the market. This type of action will show a rotation (or less buying) of safety and more buying of stocks that were hit hard by the correction. If the indicator starts to flatten out similar to early February this year or roll over like March and April it will signal a flight to safety…an most likely a correction ahead.