Study: breadth suggests that the stock market's bottom is already in


Last week we demonstrated a momentum+breadth study which supported the medium term bullish case for the stock market.
Now let’s look at the short term case for the stock market. Is the stock market’s EXACT bottom already in?
The NYSE cumulative Advance-Decline Line (one of the best breadth indicators) just made a new all-time high yesterday while the S&P 500 has yet to make a new high.

What happens historically when:

  1. The S&P 500 makes a 10%+ “small correction”, and….
  2. The Advance-Decline Line makes a new high?

Is the S&P 500’s exact bottom already in? Here are the historical cases (based on correction start dates):

  1. April 2, 2012
  2. July 16, 2007
  3. January 3, 2000
  4. July 19, 1999
  5. October 7, 1997
  6. February 19, 1997
  7. May 23, 1996
  8. January 3, 1990
  9. August 27, 1986
  10. September 25, 1967
  11. May 13, 1965
  12. September 23, 1955

Let’s look at these historical cases in detail.

April 2, 2012

The Advance-Decline line made a new all-time high before the S&P did. The S&P did not make a lower low after the A/D line made new highs.

July 16, 2007

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

January 3, 2000

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

July 19, 1999

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

October 7, 1997

The S&P 500 made a new high before the A/D line did. This historical case does not apply to today because the A/D line has already made a new high.

February 19, 1997

The S&P 500 made a new high before the A/D line did. This historical case does not apply to today because the A/D line has already made a new high.

May 23, 1996

The S&P 500 made a new high before the A/D line did. This historical case does not apply to today because the A/D line has already made a new high.

January 3, 1990

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

August 27, 1986

The S&P 500 made a new high before the A/D line did. This historical case does not apply to today because the A/D line has already made a new high.

September 25, 1967

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

May 13, 1965

The S&P 500 made a new high before the A/D line did. The A/D line did not go on to make a new high.
This historical case does not apply to today because the A/D line has already made a new high.

September 23, 1955

The Advance-Decline line made a new all-time high before the S&P did. The S&P did not make a lower low after the A/D line made new highs.

Conclusion

It is rare for the cumulative Advance-Decline line to make a new high before the S&P 500 does. Only 2 of these 12 cases saw this happen. But when this did happen, the S&P’s bottom was already in. The S&P did not go on to retest or make a lower low.
This suggests that February 9, 2018 was the bottom of this stock market correction. The bottom is already in.

11 comments add yours

  1. Do you still think there will be another small correction this year then?

    • Yes. This breadth indicator tells us nothing about what will happen in the 2nd half of 2018. But then again, I could be wrong. I don’t trade the small corrections, only the significant corrections (which are much easier to predict).

    • Hi Greg,
      Those were significant corrections. Magnitude of the corrections were much bigger (17% and 21%).

  2. Very interesting take, Troy! I’m trying to recreate your $NYAD chart on Stockcharts.com (free version), and while my chart looks similar, the peak value is about 218,000 vs your 34,233. Any advice on chart configuration? Thanks!

    • I’m on the paid one. Maybe there’s a difference? Not sure.
      It’s just NYSE Advance-Decline Issues, then “cumulative” (there’s a drop down box)

      • Yep – $NYAD and Cumulative. I see StockCharts.com offers a free first month trial. Do you have any thoughts on their Basic / Extra / Pro levels of paid service?

  3. Great study thanks, u were very hesitant with a few posts over the last 6 weeks with back and fourth switching if we were to retest or not. This is noted in select key posts over the last 6 weeks. Thank you for the convivtion with this post

    • Yes Matt, you’re right. The short term is very hard to call, which is why I generally don’t try to.

  4. Dear Troy, without a shadown of a doubt, the SNP is already in and the SNP has become a dip buyer’s mkt for now.
    Good analysis on the SNP.
    Well Done Troy!
    Keep up the good analysis.

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