An options volatility tracker has produced a ‘spike peak’ buy signal for stocks for the first time in months, at a time when internal market indicators are negative You can’t always grade the stock market on a curve. If you did, the current market would likely fail, and prices would be much lower. Readings of market breadth, which take into account how the majority of stocks are performing, rather than just those in major indexes, are negative on many fronts.
And yet, even with higher oil prices and higher interest rates, both seen as harmful for stocks, the benchmark S&P 500 index is only a little more than 2% below its Aug. 13 record close. And a recent development in the options market has even produced a buy signal. Infrastructure investing: A hedge against inflation and geopolitics?Play video: Infrastructure investing: A hedge against inflation and geopolitics?
Breadth has been a problem for this market for a long time, but it has now become a more severe problem. What I’m referring to is simple breadth — the number of advancing issues minus the number of declining issues. The strong S&P 500 rally over the past 16 months or so has been led by a relatively narrow group of artificial-intelligence-related stocks.
Many other stocks are not doing as well. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. On Friday, although the S&P 500 closed up 0.2%, nearly two-thirds of its component stocks declined, according to FactSet data. Meanwhile, volume breadth — the volume of advancing stocks minus the volume of declining stocks — has been more in tune with the market rally because of the heavy volume in those AI-related stocks.
In any case, simple breadth technical indicators have been flashing sell signals for stocks for some time. Now they have worsened to the state that they are in deeply oversold territory, which might suggest a bounce may be needed before declines can resume. But “oversold does not mean buy.” Yes, there could be sharp, countertrend rallies, but these breadth indicators will not improve to buy signals until there are at least several days of positive breadth.
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