Bad Breadth! (not my pun).. breathless article on breadth..
"Sunday December 19 2:06 PM ET
More Losers Than Winners Make Stocks
Vulnerable
By Kristin Roberts
NEW YORK (Reuters) - Bad breadth can kill. For even as the sweet
smell of technology stocks seems to lure more money into the market,
analysts say Wall Street will not escape the peril created by a few
highfliers amid so many laggards.
An outright awful ratio of advancing stocks to decliners, or market
breadth, has technicians fretting about a bearish downturn in the new
year.
Many say the equity markets are headed straight for a correction, or a
drop of at least 10 percent, paring the Street's main indexes back from
all-time highs logged in 1999.
``We'll get a correction, no doubt about it,' said Peter Cardillo,
director of research at Westfalia Investments. ``Take out a selective
group of stocks (that have advanced) and you can say the rest of the
market is in a bear market.'
``It's ugly,' said Ralph Acampora, director of technical research at
Prudential Securities. ``The advance/decline line is in freefall. It's
been going down for 22 months.'
``But very few people really understand it. The public out there could
care less about the advance/decline line. When the Dow's up 100
points in a day, they're happy,' he said. ``But technicians can't do that.
It's the old saying -- you have continued deterioration in breadth, that
will eventually lead to a bear market.'
Vanguard Of Market Ascent: A Small Party
The market surge of the preceding year has seen just a handful of
stocks like America Online Inc. (NYSE:AOL - news) and Qualcomm
Inc. (NasdaqNM:QCOM - news) driving major indices higher. The
narrowness is particularly acute in the Nasdaq and its unprecedented
power.
The NASDAQ composite index (^IXIC - news) has gained more than
71 percent year-to-date and is poised to log its strongest year since its
founding in 1971.
But the technology-driven composite is weighted by market
capitalization, meaning the biggest and most expensive stocks have the
greatest influence, thereby controlling both the market's spurs, and
reins.
As for the smaller fry, they are mostly trading lower, according to the
advance-decline statistics.
The breadth advance/decline indicator is designed to track the
market's momentum and anticipate large upswings or downswings in
price. It is based on the concept that the number of stocks moving
higher during a market advance is positively related to the chance that
the market will continue rising.
Likewise, the number of securities slipping lower can be correlated
with the probability of declines.
Nasdaq has logged only 77 trading days of positive breadth out of a
total 243 days so far this year, according to numbers provided by
Nasdaq. And most recently, the number of stocks reaching fresh lows
has increased, with the New York Stock Exchange seeing more than
400 new lows in recent sessions.
``After prolonged periods of deteriorating breadth, markets don't end
peacefully,' said Larry Rice, chief investment officer at Josephthal
Lyon & Ross.
``It's rare that the breadth is going to catch up to the averages. It's
usually the averages coming down to catch up to the breadth,' Rice
said.
Not Everyone Takes A Breadth
Richard McCabe, chief market analyst at Merrill Lynch, said the
utility of the measure has fallen into question, despite its correctly
signaling the consumer-goods stocks bust of the 1970s and the
biotechnology slip of the late 1980s.
And Morgan Stanley's Peter Canelo is one who clearly takes issue
with the technical measure.
``I think people are making a mistake by focusing too much on
breadth,' said Canelo, U.S. equity strategist at Morgan. 'It's taken so
many people down the river. For so many technicians that have
invested so heavily in the meaning of this concept, it has not helped
them to anticipate the powerful up moves in this market.'
Indeed, the trend of negative breadth has persisted for more than a
year and a half. While decliners have wrecked advancers, the Dow
Jones industrial average (^DJI - news) rose to its all-time high of
11,365 this past summer. Nasdaq has surged more than 700 points in
just more than one month to trade above 3,700.
The advance/decline line is now at 12-month lows and according to
some charting measures, breadth is reaching levels not seen since
1995, according to data from research firms Notley Information
Service and Investors Intelligence.
Morgan's Canelo contends that breadth fails to accurately measure the
new trend in stock buying -- which sees stocks logging spectacular
gains in one trading day and then ticking lower for the following two
or three trading sessions.
A POST JANUARY RETREAT?
Still, many technical gurus say history will win this battle and they
predict a severe market correction in 2000, with Nasdaq's top names
giving up their stupendous gains of 1999.
Only after money comes out of the market will it find its way back,
possibly into the cheaper, smaller stocks, they say.
If Wall Street does in fact retreat, it is not likely to happen until after
January, and most technical watchers say they expect gains to continue
through the first quarter of 2000.
``Money flow coming in in January should be strong enough to hold us
together for the next couple weeks,' said John Brooks, director of
marketing at Notley Information Service, which provides technical
analysis on global markets.
``It's the combination of weakness in the overall market, overvalued
performance in the tech area, and the fact that interest rates probably
are going up early next year that will probably be the cause of an
eventual stop (to the stocks rally), in let's say February or March,' he
said.
Merrill Gets Whiff Of Unhealthy Breadth
Merrill Lynch's McCabe said: ``I'm expecting a little more choppy
strength between now and early January mainly for seasonal reasons.'
``But this breadth is an unhealthy condition. When it goes on this long,
it's resolved by a weak majority dragging down the strong minority,'
he said. ``It'll be the big techs that really go down. And because those
stocks had a big positive impact on the averages and made averages
look so good this year, they may have the opposite affect of making the
averages look bad and overstating the weakness in the market.'
So why are investors not afraid if the technicals are telling a clear
tale?
``Because equities are basically the only place to be' Josephthal Lyon
& Ross' Rice said. ``Since money managers are paid for performance,
they're going to go where they can make money. And that continues to
be in large, liquid names and tech.' |
