Bad Breadth: It's Contagious
Last week we highlighted the fact that breadth (advancers minus decliners) in the market wasn't keeping up with price. Below is an updated chart of the S&P 500 and its cumulative A/D line, and while we can see that the S&P 500 made a new high on Thursday (7/12), breadth in the market remains below its highs from the Spring. Looking at the bright side though, at least the market managed to break its trend of lower highs in breadth with each rally in stocks.
Looking across the Atlantic to Europe shows an even less promising picture, at least in terms of breadth. Below we show the Dow Jones Euro Stoxx 50 Index and its 2007 cumulative A/D line. Here we see that even though the index has made several attempts to surpass its highs from June, each rally has been powered by fewer stocks, creating a pronounced downtrend in breadth.
Again, as we noted last week, while this does not necessarily mean the major averages of the US and Europe can't continue higher, it does indicate that investors will need to be more selective in their stock picking.
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