The Concept
The percentage of members above the 50-Day moving average risk-off model seeks to identify instances in history when a low number of Index members are trading above their respective 50-day average as the Index hovers near a high. The model will issue two separate alerts based upon the following conditions.
Market Breadth Signal 1
Condition 1: Percentage of S&P 500 members <= 65%
Condition 2: S&P 500 Index <= 0.25% from 252-Day High
Condition 3: If Condition 1 & 2, start a days since true count
Condition 4: If days since true count <= ten days and the percentage of S&P 500 members crosses below 50%, signal risk-off.
Condition 5: If percentage of members crosses above 66%, reset condition = true.
Market Breadth Signal 2
Condition 1: Percentage of S&P 500 members <= 54.5%
Condition 2: S&P 500 Index <= 0.25% from 252-day high
Condition 3: If Condition 1 & 2, start a days since true count
Condition 4: If days since true count <= ten days and the S&P 500 5-day rate of change is >= -1%, signal risk-off.
Condition5: If percentage of members crosses above 63%, reset condition = true.
Current Situation - healthy market breadth
Let's take a look at some charts and the historical signal performance. Please note, all performance statistics in the chart are calculated as a short signal, whereas annualized returns result from buying the S&P 500.
2015-2016 Oil/Commodity Bear
2007-08 Financial Crisis
1998 LTCM and Internet Bubble
1990 Savings & Loan/Iraq Oil Spike
1980 Oil/Commodity Bubble
1973-74 Bretton Woods/Nixon Shock/Oil Embargo
1966 Bear Market
1937-38 Bear Market
1929-32 Bear Market
Signal Performance using Market Breadth
As one can see, performance is weak in the 1-8 week timeframe, with several z-scores approaching the significant level of two. I would also add that the model utilizes a time stop and indicator above stop level for exits. The failsafe level for the S&P 500 model is 69.5%, and it has only triggered four times in history. i.e., the DIT exit occurs in most instances as the indicator does not improve to a level that would trigger the stop.
Historical Correction and Bear Market Table
The following table provides a historical signal perspective for the percentage of members above the 50-day average risk-off signal. A "yes" in the last column indicates that a signal triggered either before or just after a significant correction or bear market peak.
International Signals
The following international markets are included to show that the market breadth concept works on a global index basis.
Japan - Nikkei 225 Index
Canada - S&P/Toronto Stock Exchange
Conclusion
As the historical correction and bear market table shows, the percentage of members above the 50-day average has triggered ahead of several major market peaks. The signal should always be used in conjunction with other risk-off models as a weight-of-the-evidence approach provides a more favorable outcome. Given the current level, an alert should not be expected in the near term.
