12/10/2020 Once in a Blue Moon Sentiment and Breadth

Once in a Blue Moon Sentiment and Breadth

Troy Bombardia
 Published: 2020-11-24 at 04:29:03 CST
Something truly rare is happening in nancial markets right now. Both sentiment and breadth gures are at multi-
year highs (if not multi-decade highs). When this happens, investors and traders split into 2 camps: those who think
that stocks will crash (sentiment camp), and those who think that this is only the start of a great bull market (breadth
& breakout camp).

Things are never so black and white. The 2 narratives can co-exist if we consider 2 di erent time frames.

While unimaginably high sentiment can and usually does lead to short term losses and market volatility, incredibly
strong breadth is more of a long term bullish sign for stocks.

In other words, this may be the start of a bull market, BUT bull markets do not grow to the sky non-stop. There are
normal ebbs and ows. The following charts will help you understand these 2 time frames right now.

As always, don't let someone else do your thinking for you. Do your own homework, think carefully, and ONLY take
what I'm about to show you as input into your own trading and investment process. At the end of the day you are the
steward for your own portfolio.

Sentiment

The following chart illustrates the % of our sentiment indicators that are showing excess optimism right now. This
gure is at a 15 year high.

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All but 1 of the historical
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12/10/2020 Once in a Blue Moon Sentiment and Breadth

1. The January 2020 historical case needs no repeating. 1 month later the most rapid recession and market crash
in history began.
2. The November 2004 historical case saw the S&P 500 chop sideways over the next 11 months
3. The January 2004 historical case witnessed the start of a multi-month pullback
4. The October 2003 historical case was the only case in which stocks rallied higher.
5. The August 2000 historical case needs no explaining. The dot-com bubble imploded and U.S. stock indices
cratered over the next few years.

Will the U.S. stock market use months of volatility or a major pullback to wash out current extreme sentiment? Only
time will tell. Recency bias encourages our minds to extrapolate the recent past into the future. After a fantastic year
in 2020 (especially for everyone who started trading after March!), many traders are gunning for similar gains in the
months and year ahead. But unfortunately, the near future is rarely just like the recent past, especially at extremes.

With that being said, bulls should be glad that breadth is very strong across the world. Rarely do major bear markets
begin on the backs of incredibly strong breadth. Breadth needs to weaken before the possibility of a bear market
should be considered more seriously.

Breadth

The % of S&P 500 stocks above their 200 dma (in a long term uptrend) is at its highest level in 5 years (90%).

When this happened in the past, the S&P 500 almost always rallied further over the next year:

Traders should pay signi cant attention to the breakout and strong breadth in small caps. Whereas small caps lagged
for much of this year, this sector rotation is good news for long term bulls.
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Historical cases which saw a multi-year breakout on strong breadth usually saw more gains in the year ahead.
Fighting the breakout did not pay, unless you were a nimble short term trader.

Value stocks are also ( nally) having a eld day:

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12/10/2020 Once in a Blue Moon Sentiment and Breadth

To the north in Canada, an increasing % of stocks are in a long term uptrend as the TSX approaches its previous all-
time high:

Breakouts and strong breadth are not only limited to the U.S.. Across the Paci c, Korean equities are breaking out:
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12/10/2020 Once in a Blue Moon Sentiment and Breadth

In Australia, the % of stocks above their 200 dma is at the highest level in a decade:

And in the UK we can see a similar story:

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12/10/2020 Once in a Blue Moon Sentiment and Breadth

Overall, more and more indices and stocks around the world are breaking out.

In general, it's not a good idea to ght the trend. The trend is your friend until the end, when it bends. Insane
sentiment can bend the bull market in the short term, but not necessarily the long term.

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