Breadth Indicators Illustrate Recent Dire Conditions
The economic landscape of the modern world has become increasingly complex and tenuous, particularly in the face of the COVID-19 pandemic that continues to affect countries throughout the world.
In the U.S., the federal government and task force have taken extreme measures to keep the nation afloat. However, there are a plethora of indicators that tell the story of just how dire economic conditions have become in recent months. At the forefront of these indicators is the Breadth Indicator, which reflects the collective health of the stock market.
The Breadth Indicator is a tool that measures the collective performance of stocks in a given index. It is calculated based on the cumulative number of stocks that are rising in comparison to those that are declining. A value of one represents equal price performance between advancing and declining stocks while a lower value indicates more stocks in decline relative to those advancing.
In the U.S., the Breadth Indicator is currently at a low of 0.18, indicating that the majority of stocks in the S&P 500 are experiencing a decline in price. This is an unusual occurrence, as the indicator’s long-term average is 0.50.
A combination of the pandemic, economic uncertainty, and an imminent presidential election appears to have overwhelmed stock markets throughout 2020. With the S&P 500 index down almost 7.5 percent since the beginning of October, many market participants are viewing this as a sign of dire economic conditions to come.
This sentiment is further supported by the Trade Breadth Indicator which measures the net number of stocks in the S&P 500 that have been traded. This indicator is currently at -85.7, signaling that the majority of stocks are being sold in comparison to those purchased.
Clearly, the Breadth Indicators illustrate just how dire economic conditions have become. Despite the unprecedented monetary and fiscal responses from the U.S. government, the fear that has taken hold of investors is still evident in the current market structure. With that said, the only way to truly ascertain just how bad the situation is, is to see what actions the stock market will take in the coming months.
