What is message of stock market "internals"?

With investors blinded by “noise”, like rabbits in the headlights, market “internals”, or breadth indicators, are useful tools to assess the inner workings of the market’s rallies or corrections. These indicators are used to identify strength or weakness behind market moves, i.e. to assess how the bulls and the bears are exerting themselves.

Let’s consider two measures of stock market “internals”.

Firstly, the number of NYSE stocks trading above their respective 50-day moving averages has increased to 70.2% from almost zero in August. In order to be bullish about the secondary trend, one would expect the majority of stocks to be above the 50-day line.

Source: StockCharts.com

However, for a primary uptrend to manifest itself, most of the index constituents also need to trade above their 200-day averages. This is a slow indicator, but the number at the moment is only 29.8%. Although a big improvement on August’s 8.6% reading, the fact of the matter is that less than a third of the 500 S&P Index constituents are in uptrends at the moment.

Source: StockCharts.com

Secondly, the Bullish per cent Index shows the percentage of stocks currently in bullish mode as a result of point-and-figure buy signals. With the figure at 50.6%, this indicator is trying to reassert itself in bullish territory.

Source: StockCharts.com

As I said in posts over the past two days (see “Stock markets: In long-term indicators we trust” and “Global stock market moving averages – a mixed picture“), I would not be surprised to see a further recovery in global stock markets over the next few weeks, with those markets most deeply oversold relative to their 200-day moving averages offering the strongest recovery potential. However, to add conviction to the rally most of the global indices (as well as the majority of individual stocks) need to better their 200-day lines, and do so on better volumes seen thus far.

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