Markets Are Short-term Overbought, Especially Cyclicals, Yet Breadth is Tepid

Using an admittedly brute indicator of overbought/oversold conditions, stocks are clearly overbought here in the short-term. The number of stocks trading above their own 20-day moving average has spiked from just 4% (very oversold) to 86% in just 33 trading days. The trend is most clearly observed in the cyclical sectors, which happen to be the ones that were the most beat up on the way down (charts 1-5) and by our work remain in downtrends.

Yet, despite the market rally we’ve experienced we observe a relatively small number of stocks actually participating on a daily basis. The last chart below shows the 20-day moving average of the daily number of advancing stocks minus declining stocks. At only 177, this level is half the levels of breadth we saw at the market bottoms in 2011 and 2012 and well below the levels all throughout 2013 as stocks rallied hard.