Above is a chart displaying each correction over 5% since the March 2009 bottom (plus the recent 4.3% decline) color coded to the percentage of stocks that traded above the 50-day moving average during the correction.
The following is based on an idea I got from Charlie Bilello’s work about the types of corrections we have had since the 2009 bottom. One of such post can be found here. Below I have expanded on his work.
A widely tracked breadth reading by market technicians is stocks in the S&P 500 that are trading above their 50-day Moving Average.
Taken directly from stockchart.com:
The percent of stocks above their 50-day SMA is best suited for overbought and oversold levels. Because of its volatility, this indicator will move to overbought and oversold levels more often than the indicators based on longer moving averages (150-day and 200-day). Just like momentum oscillators, this indicator can become overbought numerous times in a strong uptrend or oversold many times during a strong downtrend. Therefore, it is important to identify the direction of the bigger trend to establish a bias and trade in harmony with the big trend. Short-term oversold conditions are preferred when the long-term trend is up and short-term overbought conditions are preferred when the long-term trend is down.
Furthermore:
In general, readings above 70% are deemed overbought and readings below 30% are deemed oversold.
Since 2009 the S&P 500 has had 15 corrections of more than 5%. The average decline has been 9.4% while the average level of stocks trading above there 50-day moving average during those corrections is 24%. What’s interesting is that since 2013 there have been only two corrections over 5% averaging a 6.8% decline and yet the average amount of stocks trading above their 50-day moving average during those corrections was 22.5%. In other words, despite smaller percent declines, more and more stocks appear to be participating than with the larger corrections of prior years. Below I have a table breaking down each respective correction followed by a table breaking down the average corrections by year.
The most recent correction that began on July 24th (if the bottom is in) was 4.3% not making the 5% cut-off for this research and yet, the number of stocks trading above their 50-day moving average at the bottom was a measly 22%. So the question then becomes, why has momentum of individual stocks been so divergent from the index that houses it? And furthermore, what are the implications if any?
Why individual stocks have lagged? I don’t know the answer to that and hope that some of you will chime in, but one possible reason that I had hypothesized was that there was a bid for the higher cap names over smaller cap ones resulting in just several strong names keeping the index afloat. This year has no doubt seen rotation from smaller cap to higher cap names as displayed by the underperformance of the Russel 2000 compared to the S&P 500 and Nasdaq. Given that, I thought perhaps that would also be the case within the S&P 500 itself since it is a market weighted index. Below are the top 20 market cap names in the S&P taken from theonlineinvestor. 
However, when I pulled up a five year comparison chart of the equal weighted S&P to the traditional weighted S&P that theory didn’t pan out so well. In fact, the equal weighted S&P has outperformed its traditional counterpart by 2.57% over the last five years and 0.69% this year alone. Taken from S&P Dow Jones Indices: 
What are the implications? I presume that at some point either stocks play catch up or the S&P finally cracks. Or maybe you should just BTFD and it doesn’t matter! What’s your take?
A Look at Breadth During Corrections Over 5% Since March 2009
The following is based on an idea I got from Charlie Bilello’s work about the types of corrections we have had since the 2009 bottom. One of such post can be found here. Below I have expanded on his work.
A widely tracked breadth reading by market technicians is stocks in the S&P 500 that are trading above their 50-day Moving Average.
Taken directly from stockchart.com:
The percent of stocks above their 50-day SMA is best suited for overbought and oversold levels. Because of its volatility, this indicator will move to overbought and oversold levels more often than the indicators based on longer moving averages (150-day and 200-day). Just like momentum oscillators, this indicator can become overbought numerous times in a strong uptrend or oversold many times during a strong downtrend. Therefore, it is important to identify the direction of the bigger trend to establish a bias and trade in harmony with the big trend. Short-term oversold conditions are preferred when the long-term trend is up and short-term overbought conditions are preferred when the long-term trend is down.
Furthermore:
In general, readings above 70% are deemed overbought and readings below 30% are deemed oversold.
Since 2009 the S&P 500 has had 15 corrections of more than 5%. The average decline has been 9.4% while the average level of stocks trading above there 50-day moving average during those corrections is 24%. What’s interesting is that since 2013 there have been only two corrections over 5% averaging a 6.8% decline and yet the average amount of stocks trading above their 50-day moving average during those corrections was 22.5%. In other words, despite smaller percent declines, more and more stocks appear to be participating than with the larger corrections of prior years. Below I have a table breaking down each respective correction followed by a table breaking down the average corrections by year.
The most recent correction that began on July 24th (if the bottom is in) was 4.3% not making the 5% cut-off for this research and yet, the number of stocks trading above their 50-day moving average at the bottom was a measly 22%. So the question then becomes, why has momentum of individual stocks been so divergent from the index that houses it? And furthermore, what are the implications if any?
Why individual stocks have lagged? I don’t know the answer to that and hope that some of you will chime in, but one possible reason that I had hypothesized was that there was a bid for the higher cap names over smaller cap ones resulting in just several strong names keeping the index afloat. This year has no doubt seen rotation from smaller cap to higher cap names as displayed by the underperformance of the Russel 2000 compared to the S&P 500 and Nasdaq. Given that, I thought perhaps that would also be the case within the S&P 500 itself since it is a market weighted index. Below are the top 20 market cap names in the S&P taken from theonlineinvestor.
However, when I pulled up a five year comparison chart of the equal weighted S&P to the traditional weighted S&P that theory didn’t pan out so well. In fact, the equal weighted S&P has outperformed its traditional counterpart by 2.57% over the last five years and 0.69% this year alone. Taken from S&P Dow Jones Indices: 
What are the implications? I presume that at some point either stocks play catch up or the S&P finally cracks. Or maybe you should just BTFD and it doesn’t matter! What’s your take?
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