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The Time To Be Bearish Clearly Isn’t Now!

  • Written by Syndicated Publisher No Comments Comments
    December 6, 2013

    Perhaps my favorite tool for measuring strength is breadth, which simply measures the percentage of constituents advancing or declining within a group or index. You can apply it to any financial market or economic series to gauge how robust an advance is. During a bull market or economic expansion you would expect breadth to be very strong where the bulk of stocks are rallying and the bulk of the country is showing economic growth. During a recession you would expect the opposite: the bulk of stocks are in their own private bear markets and various segments of the economy are contracting. Not only does breadth reveal whether you have a bearish or bullish backdrop but it can also help in spotting turning points for when the stock market is transitioning from a bull to a bear market or when the economy is slipping from expansion to contraction (recession). So, what does breadth reveal about the stock market and economy right now?

     

    Stock Market Breadth

     

    Every Friday I run a series of tests to gauge the stock market’s breadth and present the data in my “Market’s Weekly Bill of Health” reports (click for archive). For a more in-depth look at stock market breath, please see my report out tomorrow. For today’s article I’m going to present one of the more common measures of breadth, which is the percent of stocks above their long-term moving average (200d MA). During healthy bull markets the bulk of the S&P 500 members are above their 200d MA. When the market becomes split with only half the stocks above and the other half below (see chart below), this is a warning sign that the market may be close to a peak. Currently, market breadth is very strong with over 80% of stocks in long-term upward trends and does not indicate a top is in the process of being formed.

     

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Philly Fed

 

Another measure of economic breadth is the Conference Board’s Coincident Diffusion Index, which is often helpful in giving advance warning of recessions and slowdowns in the market, as seen below. Currently, it has a very strong reading at 95% and, in conjunction with the information above, helps to explain the very low, 6.5%, probability of an economic recession according to our Recession Model also shown below.

 

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Financial Sense

 

(c) PFS Group
PFS Group

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About The Author – Chris Puplava, Financial Sense Online

Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.

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