EC The Grinch May Steal The Christmas Rally

Breadth tends to tell you where you are going in a market. Breadth is sending negative signals.

The direction of breadth has diverged from the direction of the market-cap weighted indexes (indexes dominated by a few giant stocks, like Apple and Exxon) creating the negative warning signal.

Breadth is moving down and the market-cap indexes are mostly flat for the year, with a recent strong rally from a short-term correction — but the indexes have still been unable to exceed their mid-year highs. Breadth may be the Grinch that steals the Christmas rally.

These charts show the deteriorating underpinnings of the US stock market.

Each chart shows the distance of the S&P 500 price from its trailing 1 year high in orange (using right scale); and a parameter of breadth of the S&P 1500 (large-cap, mid-cap and small-cap combined) in gray for the end-of-week value, and in dashed black for the 13-week average (3 months) of that weekly value (using left scale).

MEDIAN S&P 1500 STOCK

This first chart shows the distance of the median S&P 1500 stock from its trailing 1 year high.

(click images to enlarge)

You can see in the orange line that the S&P 500 had its correction in August, but that the median S&P 1500 stock began its slide from its trailing 1 year high near the beginning of the year, giving a warning.The median has recovered somewhat on a weekly basis, but is still declining of a 13-week basis.

The median stock is off its 1-year trailing high by more than 13% as of Friday, and about 16% on a 13-week average basis.This compares to the S&P 500 index being off a bit less than 2% from its trailing high.

At the end of 2014, the median stock was down only 4% on that Friday, and 8% on a 13-week basis — a lot better than the 13% and 16% now. The median stock was also off its high by 4% at the beginning of 2014.Much damage has been incurred this year.

This is an important divergence. The median is falling while the market-cap weighted index dominated by the giant companies is essentially flat and attempting to reach prior highs.How long can the giant companies do well if many smaller companies do not? Generally the answer is not too long.