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Bulls Need Breadth Thrust

As technicians, we have a wide variety of tools to help identify when markets are trending and when they are not. We also have tools to identify when the market is forming major tops, as well as bottoms.

When looking to identify a market bottom and the start of a new uptrend, nothing is more paramount than the breadth thrust. These are ultimately extreme bullish readings that mark the initiation of a new trend. 

Breadth thrusts can occur in a range of indicators including the percentage of stocks making new highs, the percentage of stocks above moving averages, or even advancing and declining issues and volume.

All Star Charts, with data provided by Optuma

Here’s an example of a breadth thrust that fired this week in the percentage of S&P 500 stocks at new 20-day highs. Going back to the 1970s, we’ve seen this indicator pierce the 55% level just 28 times. And of those 28 times, the market was only lower 12 months out on one occasion (2002).

While this certainly bodes well for the bull camp, the way we’d know if this is truly an initiation phase is by getting more breadth thrusts in the future. 

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Small-Cap Growth Challenges a Critical Level

As stocks extend their recent rally, we continue to see more and more areas thrive. Even some of the weakest groups are participating higher.

As you can see in the chart, the current bounce has pushed the small-cap growth ETF (IWO) right back to a critical level. This area acted as resistance back in 2018 and 2020.

All Star Charts, with data provided by Optuma

With so much price memory at current levels, IWO could offer a hint to confirming evidence whether growth stocks are putting in a real bottom.

If IWO can reclaim this critical level of interest, it would be a major point for the bulls. On the other hand, if price is rejected here, it could indicate that we are running out of steam, and this rally could slow down.

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Will Coal Catch Higher?

Materials stocks are enjoying a rally as markets across the board continue to find their footing.

One group that stands out is coal. Not because coal is leading the way higher, but because of the lack of participation on the rise.

All Star Charts, with data provided by Optuma

We've created an equal-weighted custom index of the largest coal stocks listed on U.S. exchanges. As you can see, the index recently retested a shelf of former highs from 2018.

If the index were to break down and violate those former highs, it would not bode well for materials as a group. After all, we would want to see coal stocks continue to participate if this is a rally that’s going to have legs.

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Gold Holds the Line

Precious metals have been one of the worst-performing areas of the market since late 2020. As broad selling pressure hit stocks and commodities, these shiny rocks broke down to fresh multi-year lows — well, all except gold.

The dual-pane chart below shows our equal-weight precious metals index and gold futures.

All Star Charts, with data provided by Optuma

Notice how the index has completed a two-year consolidation. This speaks to the breakdowns in silver and platinum, and the weakness within the precious metals space.  

It would make sense to see a similar breakdown in gold. Yet, it continues to hold within its multi-year range. Some of the best information comes when markets don’t behave as we would expect. We’ll continue to keep a close eye on gold and the entire precious metals space.