Analysis of Market Breadth

The SPY is essentially at all time highs, but it is important to have some sort of skepticism here. It should be known that there are only a select few of stocks in the SPX index that are driving the majority of performance. For example, the SPX is at a YTD return of +6.07%, while the S&P 500 equal-weighting index (EWI) (each company in the SPX get equal weighting, instead of the index being weighted on market capitalization) has a YTD return of -13.42%.

This goes to show the complacency in identifying the negative aspects in relation to the SPX's return. There is a clear discrepancy within the individual market breadth, one that has rarely been seen before. There is also a growing complacency by investors who are clearly unaware of the underlying systematic risks at play below the casual surface area of price. For instance, we will examine Apple. Apple is about 7% of all holdings in the SPX tracking ETF, SPY. Also, the top 5 holdings for the SPY ETF (AAPL, MSFT, AMZN, FB, GOOGL) have 21.58% of the proportional weighting of the index, who just happen to be up incredible amounts YTD.

Apple's underlying volatility complex (VXAPL) has risen 116.45% YTD, with the underlying rising an incredible 64.77% YTD. Furthermore, Apple's volatility when it peaked versus the prior 15 day, and approximate 1 month average were both up +25.11% and +30.74% respectively. This means one of two things. First off, with this great bull run, the standard deviation of outcomes has subsequently widened at an incredible rate. Also, when Apple made all-time highs of $134.18 on September 1st, its volume on that trading day was down -32.45% versus the prior day, and -21.08% versus the prior 15 days. This is possibly the worst combination to have when analyzing any given security using a multi-factor model like I just employed (price, volume, and volatility). Normally, when you are long a given security, you want price to rise, volume to rise, and volatility to fall. This was clearly not the case. A significant pullback to the down side was clearly imminent (from peak, Apple fell approximately -10% to the most recent close).

I hope this quick analysis helps some readers to consider that there is more to consider than simply the price of a given security.

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A Potential Short-Sell Opportunity

In my previous post, the S&P 500 was at all-time-highs before dropping to almost -1.5% intraday as of this post. I highlighted how market participants, particularly those with superior information, were positioning for a moderate pullback in the short term. This post will explain the potential opportunity resulting from this pullback. Market Breadth I would first like to mention a simple, yet power multi-factor model that incorporates price, volume, and volatility. As of today's close, the SPY's (an ETF that tracks the S&P 500 index) volume on today's poor performance (SPY rebounded from nearly -1.4% to -0.62%) accelerated against its previous trading day, 5 day volume average, 15 day volume average, 30 day volume average, as well as the 90 day volume average by +47.72%, +50.32%, +44.40%, +30.14%, and +29.69%, respectively, with the VIX index climbing by +6.39% to 19.48. This is what you do not want to see as a bullish investor with respect to volume by market part

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Getting Green

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