Recent monthly charts suggest that despite the turbulence in the stock markets, downside risk for investors is limited. Analysts point to the persistently high levels of market breadth seen in monthly StockCharts.com plots, which show the movement of stocks in the same sector or index.
Market breadth refers to the number of stocks participating in the ups and downs of the market, providing an indication of market sentiment. A high level of market breadth suggests that the majority of stocks are advancing and declining together, so the market is moving in a relatively healthy and balanced fashion.
When monthly charts of the SP 500, Nasdaq Composite, and R 2000, the broader and more comprehensive chart of 2000 stocks showing the broader market, are studied the readings suggest a strong correlation of increased market breadth, meaning stronger sentiment that the market is essentially healthy.
In their most recent monthly StockCharts, the StockCharts team used the cumulative advance/decline line of the R 2000 and the cumulative AD line of the S&P 500. To get an even broader look they compared the S&P 500 monthly chart to other global markets. The team found that a large majority of both the U.S. and global markets have exhibited strong levels of market breadth.
The charts also show a divergence in sentiment between the U.S. market and others, with the U.S. market exhibiting higher breadth or a stronger overall sentiment. This is an indication that investors in the U.S. market, or even those trading Global markets, are generally more optimistic overall about the short-term outlook of the market.
This confirmation of strong market breadth throughout the U.S. and global markets suggests that, while not necessarily an indicator of market performance, investors should approach the current market environment with a more confident outlook. The strong breadth seen in the monthly StockCharts could be an indication that the current market turbulence is only temporary and could provide an opportunity for your portfolio to gain in the longer-term. Keep in mind that this is only an observation, not a guarantee of future market performance.