Investing

Stock Market Vitals

Gauging the health of the stock market can be tricky. There are so many variables that can be evaluated and spun in different ways to fit a narrative. Market internals are one of the primary ways in which the health of the stock market can be evaluated. They’re objective in nature and less prone to different interpretations.

Market Internals

Market internals are akin to vital signs. When you go to visit a doctor, generally you will have your temperature, blood pressure, pulse and breathing rate checked to make sure there are no immediate issues. These vital signs and their trends are generally monitored with each visit and can potentially alert your physician to anything that might be wrong with your health. Market internals serve a similar purpose. They can alert you to healthy or unhealthy stock market trends that may influence your decision-making.

One of the primary market internal metrics used is breadth. Stock market breadth measures specific trends in all of the constituents of a given stock market. For example, comparing the number of advancing stock prices to the number of declining stock prices (advance-decline line) is one way to evaluate breadth. Another way of looking at breadth is comparing the number of stock prices above and below an important threshold (i.e., a moving average of price over a specified number of days).

These breadth metrics are NOT meant to be buy or sell signals. They provide perspective on the overall trend in the stock market and whether that trend is sustainable. For example, if the overall stock market is rising the percentage of stocks that are increasing versus decreasing will shed insight into whether most stocks are rising and contributing to the broad increase or if only a few stocks are actually contributing to the rise. The ideal scenario would be that most stocks are increasing and contributing to any increase. A scenario in which only a few stocks are contributing to the overall increase would potentially be worrisome.

In the same scenario of a rising stock market, comparing the number of stocks above versus below their 200-day moving average price will provide additional perspective into the overall sustainability of the rising stock market. If more stocks’ prices are above this important average level that could potentially suggest a sustainable uptrend is in place while if more stocks are below the average level then that could suggest the uptrend is weak and doesn’t have support to continue moving higher.

These are basic examples of breadth and usually would be used in conjunction with other metrics to paint a more complete picture of what’s going on in the stock market.

Current Diagnosis

As I write this today, the number of stocks whose prices are rising versus falling is about 50/50. Not surprisingly, the market is not moving strongly in one direction or the other. Looking at the trend in the number of stocks whose prices are rising versus falling suggests the rise in the S&P 500 this year is fairly broad-based across most of the index’s constituents. This is a positive data point, supporting the overall rise in the market. This data point doesn’t mean the market can’t go down from here but it suggests the trend upward has support.

 

Turning to the number of stocks whose prices are above their respective 200-day moving averages, we see that over 70% of the members of the S&P 500 are above their 200-day moving average prices, suggesting most of the stocks in the index are in an uptrend, which should provide sufficient support (for the time being) for the S&P 500 to remain in an uptrend in the medium-term. Again, this doesn’t mean the index won’t go down from here. It simply means there is support currently for the S&P 500 to maintain its current trend.

All in all, it appears the move higher in the S&P 500 this year has good support. Again, this doesn’t mean the index won’t decline from here. These data points in isolation are telling us the S&P 500 appears to be fairly healthy right now.