Study: what happens next when the S&P diverges from breadth


It’s quite amazing how the cumulative Advance-Decline line (breadth indicator) continues to make new all-time highs while the S&P is still far below its all-time high (from January 2018).

As I’ve demonstrated before, breadth is a leading long term indicator for the stock market. Breadth divergences are also bullish for the stock market in the medium term (i.e. a few months).
As of June 1, 2018, the Advance-Decline line has made new all-time highs while the S&P is still more than -4% below its 1 year high. Here are all the historical cases when this happened, and the S&P 500’s forward returns.
*We exclude the cases that overlap in the past 2 months (i.e. we only take the first occurrence over the past 2 months).

Click here to download the data in Excel.
Here are the historical cases in detail.
January 10, 2012
The stock market trended higher.

August 2, 2010
The stock market trended higher.

July 19, 2004
The stock market trended higher.

May 2, 2003
The stock market trended higher.

September 15, 1997
The stock market trended higher.

Conclusion

The same size is small (n=5), with current case beginning on April 18, 2018. But the results are clear.
The stock market’s medium term has a bullish bias. 5 out of 5 historical cases went up in the next 3-12 months.
Click here for more market studies.

Leave a Comment