In recent times, investors have relied heavily on long-term breadth indicators to get an idea of the stock market’s overall health. Long-term breadth indicators enable traders to measure the mood of the market as well. These indicators often indicate when the stock market is in a downturn or if it’s set to enter the realm of all-time highs.
And now, those long-term market breadth indicators are giving off a signal of “caution”. The Dow Jones Industrial Average is within 0.5-1% from reaching its all-time high of February 2020. Similarly, the S&P 500, which is currently sitting at around 3,611, is within 2% of reaching its all-time high as from February 2020.
However, while the Dow Jones and the S&P 500 are near to their respective all-time highs, the long-term breadth indicator have not been as optimistic. Currently, the 50dma of the advance decline ratio (the proportion of stocks that are increasing to those that are decreasing) is hovering around 5-year lows.
The Investor’s Intelligence bearish sentiment reading is also at the highest level it has been in over 5 years. This is a reflection of the lack of confidence in the stock market among the broader market participants. Additionally, the ratio of stocks above their 200-day moving average has rapidly declined over the past month, which could be a sign of short-term weakness to come.
Overall, the market appears to be at a moment of truth as it’s hovering near to its all-time high while long-term breadth indicators are looking weak. Traders and investors should keep a close eye on the trends in the advance decline ratio, the bearish sentiment reading and the ratio of stocks above their 200-day moving average in order to get an idea of where the market is headed next. To conclude, an overall caution should be exercised when considering upcoming trades especially as the market looks to reach its all-time highs.