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S&P500 Market Breadth Does Not Signal A Correction…Yet!

500 US companies make up the S&P500 index. However, the weighting of a handful of companies has a big impact on the overall direction. That said it is wise to keep an eye on how well the other 495 companies are doing also known as market breadth because when the full gamut of companies is rising this is nothing but good news for the markets.

Weekly Index Analysis - S&P500

Since April 2021 the number of stocks within the S&P500 above their weekly 200-period moving average has been on the decline, meaning fewer and fewer stocks are keeping the bullish momentum in the index going. Most of the index weighting is within a handful of household names, and they include Apple, Microsoft, Google, Facebook, Tesla, and Amazon.

The divergence between the S&P500 and the stock market breadth is certainly not a healthy sign for the bull market especially as it has been rising since the lows of 2020, so is relatively old now. With fewer and fewer stocks keeping the rally going, the market is at risk of a major risk-off event should there be an exodus from these top stocks.

While market breadth is above the 50% line, the underlying index is most likely to remain in a bull trend if the past is anything to go by. Before damage occurs to the S&P500, market breadth often acts as a leading indicator. I also think the likes of Apple are very unlikely to be sold off for long, even if there is a market event like we saw in 2020. The Average Volume over 10 days is 130.38M shares traded. The float is 16.39Bln. With institutions holding 58.81% of that float. Meaning if Blackrock wanted to sell their position it would take them months maybe years to sell everything off with only 20% of the float trading each day.

Today’s S&P500 heatmap is showing a slow start to the US session with Tesla bouncing back 4.10% now that Elon Musk is coming to the end of his share dealings.

The monthly chart is the clearest way to see the overall trend since 2020 and before the COVID-19 sell-off. If we had bought every time there was a close back above the median line (blue) of the 20-period Donchian Channel or even bought a breakout of the new highs and trailed the Stop Loss up the median of the 20-period Donchian Channel, we could have captured most of the trend. If there was a falling off the fiscal cliff in 2022 which brought the S&P500 crashing down, the 3800 level would be my first downside target.

The weekly chart also clearly shows the buying of new highs is currently working out well for trend following traders as the 20 & 50-period Donchian Channels continue to keep traders in a trade if they trail the stop loss up by either the lower bound of the 20-period channel or for those with deep pockets trailing the lower bound of the 50-period channel. Buying the dip at the mid-line of the 20-period Donchian channel is equivalent to buying the 50-period moving average that we have been monitoring this past year.

On the daily time frame, the deep retracement from the all-time high to the most recent swing low ended on Monday with the S&P500 reversing off its lows during the US session. Turn around Tuesday came into play as Omicron worries lifted and fiscal stimulus spending was put back into the global system. The daily close yesterday was back above the daily 50-period median line and today we are seeing a continuation to the upside. With less than 100 points to go before price makes a new all-time high, there is a saying never short a quiet market. Especially one that is fundamentally a driver of innovation and economic growth like the S&P500.