Market Breadth and Relative Strength

Market Breadth and Relative Strength

Posted on July 18, 2022
This weekly update will focus on current market sector rankings and areas of interest, as well as market breadth.  As we enter mid-July, volatility in the broad markets remains high and the market is in a short-term trading range, with neither the upside nor downside winning out just yet.

Market Breadth
Over the last few weeks, Nasdaq’s relative strength to the S&P 500 has ticked upward.  This is normally a bullish indication—one would expect technology stocks would outperform during market rallies.  However, over this time period, both the Nasdaq 100 and S&P 500 have put in a very short series of lower highs.  Additionally, when we look at market breadth, it remains weak.

When we have discussed market breadth in the past, using the Advance-Decline Line (A/D Line), it has been during an upward trending bull market.  In the case of a bull market, ideally you would like to see a rising tide lifting all ships.  Now that the markets have entered a bearish period of high volatility, we are waiting for the A/D Line to show signs of “positive divergence,” meaning that if the market puts in a new relative low point, the A/D Line does not.  If the market puts in a new relative high point, then we want to see the A/D Line puts in a higher high.

Right now, the A/D Line appears to be weaker than the S&P 500.  While the market has seen a short-term, sideways trading range, with some higher lows, the A/D Line has experienced similar low points, and lower high points.  You can see this in the chart below, which shows the S&P 500 with the Advance-Decline Line of the S&P 1500.  As the market has had some up-swings, less stocks are participating in the short rallies.

Source: Optuma Technical Analysis Charting Software

Sector Rankings
It was mentioned above the Nasdaq has had rising relative strength over the past few weeks.  The Nasdaq index is largely technology-dominated.  So, while tech stocks have outperformed the general markets in the short-term, they have certainly underperformed in the grand scheme of 2022.  Right now, the top 3 US sectors are as follows:
  1. Health Care
  2. Utilities
  3. Consumer Staples
Information Technology holds the 5th spot; Consumer Discretionary (Amazon & Tesla) are in 6th; and Communications is near the bottom of the sector rankings at slot #9 (out of 11 sectors).  Basic Materials and Financials are the worst two sectors right now.

Looking at various market industries, BioTech is the top ranked industry in our universe, on a risk-adjusted basis.  After to struggling to find any momentum, and repeatedly putting in lower highs and lower lows, it has found a bit of strength recently.  The chart below shows the Nasdaq BioTech index.  Here are a few points on the chart:
  • (1) Breakout above the previous trend of lower highs
  • (2) Double Bottom—the index did not put in a lower low, and instead matched the previous low and trended higher
  • (3) Rising Relative Strength

Source: Optuma Technical Analysis Charting Software

Bottom Line
The markets are in a short-term trading range.  Volume has declined.  Right now, more traditionally “defensive” sectors are leading while the tech-oriented sectors fall in the middle or bottom of the sector rankings but have seen a little bit of strength recently.  The few up-days we have seen since the market’s low in mid-June have not had significant participation—market breadth is weak.

The market has a lot of negativity it needs to fight through.  Whether it is talks of inflation, the Fed, or recession, the market is still volatile and has more working against it right now than it does for it.  Even though Friday was a large up-day of close to +2%, that is a bear market characteristic.

From a portfolio management perspective, the short trading range we have seen allows us to identify areas of rotation.  We have seen strength shift away from certain market sectors and into areas like BioTech or Consumer Staples.  We expect the market to remain volatile, in both directions, as it figures out where it wants to go.  We will continue to make adjustments to ratchet the portfolio as the market goes through its various gyrations.  
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.