In the 8/18 World Snapshot, TPA pointed out that the number of stocks trading in a long-term uptrend (50DMA>200DMA) has been declining since May; creating a cautionary divergence as the market continues to move higher.
“The chart below shows that even as the S&P500 (SPY) moved higher, the percent of stocks in a long-term uptrend (50DMA>200DMA) has been declining since the third week in May. The indicator’s 20DMA fell below the 50DMA in July, pointing to a continued decline for 50DMA>200DMA %.”
(TPA provides the chart from the previous report at the bottom of this report.)
In addition to the divergence mentioned on 8/19, TPA now points out that the percentage of stocks in the Russell 1000 now trading above their 200DMA has fallen to 75% from over 94% at the end of April. This has occurred as the market continues to make records. For a point of reference, the percent of stocks trading above their 200DMA was 3.16% on 3/20/20 – near the nadir of the 2020 Covid pandemic selloff.
The chart below shows the Russell 1000 and percent of stocks above the 200DMA for the past year. TPA has highlighted the recent divergence. Chart 2 shows that normally when the percent of stocks trading above their 200DMA declines, it is coincident with a market drop. To put this another way, a healthy market rally occurs when most stocks rise together. If the market rallies, but the percent of stocks trading above their 200DMA falls, that means that fewer and fewer stocks are holding up the benchmark index. This “narrowing of the market” is riskier than a broad-based rally.