I’ve created a new breadth indicator that uses our sentiment indicator scores along with the most bullish and most bearish lists as its basis. I wasn’t happy with the way I was calculating breadth before because the method was too subjective.
The new algorithm is completely automatic and scores the stocks in the most bullish list against the stocks in the most bearish list (then does a bit of math to put it on a scale from -100 to 100). Basically the indicator gives a measure of how many stocks have support on the Twitter stream against the number of stocks that are showing weakness on Twitter. When the indicator is above zero there are more bullish stocks than bearish. Of course, below zero means more bearish stocks than bullish.
At first glance, here are a few things I noticed when comparing breadth to the S&P 500 Index (SPX). First, all of 2013 did not see a reading below zero. Which is what should be expected in a year that the market rallied strongly without any serious corrections.
Next, the number of stocks that have support from traders on Twitter is still very high considering the past five days of decline. Compare today’s reading to the small decline in April of 2013. A lot more damage was done to breadth than this past week. Also notice that the indicator dipped close to zero during August of 2013.
Lastly, all of the declines during 2013 were preceded by a negative divergence in breadth. The decline over the past week came without any deterioration in breadth. It posted readings near 80 in November and again just last week.
When I add it all together it looks like this decline is not being take seriously by traders on Twitter…yet. An alternate view would say that everyone was way to bullish and has been taken by surprise. I’ll be watching this indicator closely on the next rally to see if it confirms or diverges from price…if we get a rally. 😉