Swoon Factor At High Danger Level

In trying to anticipate any dangerous stock market collapses, I keep an eye on leading economic indicators, as I’ve written about before. But the truth is, no matter how much you study these things, the market has studied it more and will beat you to the punch about every time. I am a great believer in the efficient market theory, so I pay more attention to market behavior than anything else. 

One such market behavior is breadth, what all the small stocks are doing that are not seen in the major averages we all look at. Smaller stocks seem to be more efficient in seeing things coming for whatever reasons. Maybe it’s because there are more of them and they are less moved by en masse trading, ETFs and so on. So they discount information better as a group. Low breadth, when the smaller stocks are not doing as well as larger index stocks, happens often, but not always, in conjunction with major market declines:
 

This Business Insider chart from the article “The Stock Market’s Breadth Is Unusually Shallow”shows the red zone breadth levels occurring with the 2000 market top, the choppy, weak 2004 market, the 2007/2008 market top, the 2011 top, and it’s showing up now. We are far in excess of the one standard deviation away from the 30 year average. But this condition also showed up several other times with nothing especially bad happening.

All the breadth calculations put moving averages, etc. into a formula and crank out a number. But another way to approach this is with the “eyeball” method. You can survey a set period of a stock’s behavior, say 5 months, and classify it as normal or an abnormal swoon. This is somewhat subjective. But I did some surveying of the smaller stocks and used some rules for identifying an unusual swoon: