Over the course of the 10-month¬†bull,¬†the breadth of the market advance went from¬†”uninspiring” to “genuinely¬†amazing.” Simply stated, the¬†large number of stocks participating¬†in¬†the general uptrend¬†pointed to a rally that has been as¬†wide-ranging as the Grand Canyon.
In understanding market breadth, analysts look at a tool called the Advance-Decline Net %. Each day, one uncovers the number of advancing stocks and the number of declining stocks within an ETF.¬†One calculates the Net % (e.g., [30 advancers- 20 decliners]/50 securities = +.20 or 20%). And one plots the results over the course of¬†trading days that may represent 3 months, 6 months or a whole year.
For example, in April 2009, SPDR Select Energy (XLE)¬†was the only economic segment with an¬†A/D Net % above a 1-year trendline (250-day SMA). Today, all 10 major economic segments in the S&P 500 have¬†A/D Net %s that are above 1-year trendlines.
In examining a cyclical bull with an exceptionally broad-based¬†gain, then, is there any sign of fatigue? Actually, there is. There are 5 ETFs with negative A/D Net %s over 3 months¬†(60-Trading-Day SMA).
|5 ETFs With Weak Breadth Over The Last 3 Months (10/9/09-1/8/10)||¬†|
|¬†||¬†||¬†||¬†||¬†||¬†||¬†||Price Breadth using AD Net % For 60-Day SMA|
|iShares Russell 2000 (IWM)||¬†||¬†||¬†||¬†||-0.1%|
|iShares Home Construction (ITB)||¬†||¬†||¬†||-0.5%|
|Retail HOLDRS (RTH)||¬†||¬†||¬†||¬†||-0.8%|
|PowerShares WilderHill Clean Energy (PBW)||¬†||¬†||-1.3%|
|Regional Bank HOLDRs (RKH)||¬†||¬†||¬†||¬†||-1.4%|
For the most part, weakness is readily explained. Concerns about the exposure that regional banks have to commercial property dampens enthusiasm for the Regional Bank HOLDRs (RKH). High unemployment levels¬†exert pressure on¬†consumers such that the Retail HOLDRs (RTH) may not be firing on all cylinders. And the general shakiness of new home demand is a thorn in the side of Home Construction (ITB).
Yet the appearance of iShares Russell 2000 (IWM) on this screen is a bit disconcerting. After all, the fund itself is in a strong uptrend hitting higher highs.
It appears likely that¬†the¬†advancers in the Russell 2000 are companies that have a stronger market cap weighting within the index. Nevertheless, if fewer and fewer small stocks advance, even as iShares Russell 2000 (IWM) climbs, the¬†weakening breadth may be an early sign of bull market fatigue.
If you‚Äôd like to learn more about ETF investing‚Ä¶¬†then tune into ‚ÄúIn the Money With Gary Gordon.‚ÄĚ You can listen to the show ‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod. If you‚Äôd like to subscribe to ETF Risk Alert, click here.
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.