U.S. stocks are making a breadth divergence: why this isn't as scary as it sounds


The S&P 500 is making various bearish breadth divergences right now. While this sounds scary, I wouldn’t be too concerned about it:

  1. With so many breadth indicators out there, there will almost ALWAYS be a bearish breadth divergence.
  2. Breadth indicators aren’t particularly useful. They’re right 50% of the time and wrong 50% of the time (i.e. no better than a monkey throwing darts at a chart).
  3. Breadth “deteriorated” throughout the entirety of 2017 while the U.S. stock market soared. Most of the failed bearish indicators from 2017 were breadth indicators.

Here’s an example. Right now, the S&P is up >3% from 8 months ago (January 2018) while the % of S&P 500 stocks that are above their 200 daily moving average is down by -14%.
Some traders see this as a sign of “bearish breadth divergence”.

Is it really bearish though? Here’s the data.

As you can see, bearish breadth divergences are a hit-and-miss. Some bullish, some bearish. Not consistent as an actual bearish sign for the stock market.
*This data is limited to 2003-present.

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