Market Insights: Wild Market Breadth Swings

Milestone Wealth Management Ltd. - Sep 02, 2022

Macroeconomic and Market Developments:

  • North American markets were much weaker over the past two weeks. In Canada, the S&P/TSX Composite Index was down 4.20%. In the U.S., the Dow Jones Industrial Average declined 7.08% and the S&P 500 Index fell 7.19%.
  • The Canadian dollar was also down the last two weeks, closing at 76.15 cents vs 76.96 cents USD.
  • Oil prices were lower over the past two weeks. U.S. West Texas crude closed at $87.03 vs $90.02 USD, and the Western Canadian Select price closed at $66.10 vs $69.94 two weeks ago.
  • The price of gold was down as well these past two weeks, closing at $1,710 vs $1,747 USD.
  • The big story of the past two weeks was the U.S. Federal Reserve summit in Jackson Hole, Wyoming. At the conclusion of the meeting, Fed president Jerome Powell delivered a speech reiterating their commitment to higher interest rates for a longer timeframe. Whereas this wasn’t new news, the market had been hoping for a more dovish approach to inflation, and as a result markets dropped significantly since last Friday.
  • Over the past two weeks, Canada’s big banks released earnings:
    • Last Tuesday, Scotiabank (BNS) led things off with a slight miss on earnings, with $2.59 billion in net income in the quarter compared to $2.54 billion a year earlier. Earnings were $2.10/share vs $2.11/share expected.
    • Last Wednesday, Royal Bank (RY) missed expectations reporting earnings of $2.51/share vs $2.66/share expected.
    • Also on Wednesday, National Bank (NA) reported relatively inline earnings of $2.35/share vs $2.34/share expected, although revenue came in low at $2.41 billion vs $2.47 billion expected.
    • Last Thursday, CIBC (CM) reported better than expected earnings of $1.85/share vs $1.83/share expected, with revenue matching expectations at $5.57 billion.
    • And also on Thursday, Toronto-Dominion Bank (TD) reported better than expected earnings of $2.09/share vs $2.04/share expected, with revenue of $10.93 billion vs $10.88 billion expected.
    • And this week Tuesday, Bank of Montreal (BMO) reported below expected earnings of $3.09/share vs $3.14/share expected, although revenue came in above expectations at $7.04 billion vs $6.82 billion expected.
  • Canadian mining company Turquoise Hill Resources (TRQ) announced that they have reached an agreement for Australian mining giant Rio Tinto to acquire the ~49% of the shares of Turquoise Hill that it does not currently own for C$43/share in cash.
  • In U.S. economy news, real (after inflation) GDP growth in Q2 2022 was revised higher to a -0.6% annual rate from a prior estimate of -0.9%. Upward revisions to consumer spending and inventories more than offset a downward revision to home building.
  • In Canadian economy news, Statistics Canada reported Canadian GDP grew 3.3% in Q2 2022, coming in below expectations of 4% or more. Monthly GDP rose 0.1% in June, however the early estimate for July projects GDP to decline by 0.1%. Also, the current account surplus came in at $2.7 billion in Q2, well below the $6 billion forecast. In addition, the Q1 2022 currant account surplus was revised down to $2.7 billion from the originally reported $5.0 billion.
  • U.S. employment numbers were released today, showing nonfarm payrolls increased 315,000 in August, narrowly beating the expected 298,000. Payroll gains for June and July were revised down by a total of 107,000, bringing the net gain, including revisions, to 208,000. The unemployment rate rose from 3.5% to 3.7%, primarily due to an increase in the participation rate rising from 62.1% to 62.4%.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Assessing Our Key Indicators Given Sharp Pullback: DWYER VLOG

Weekly Diversion:

Watch (or rewatch) the best two hockey highlights of the summer: the save and the goal

Charts of the Week:

It has been a couple of weeks since our last Charts of the Week, but there has been a lot going on with market movements over the last month or so, some good and some bad. We have seen strong market breadth through the first two thirds of August, followed by poor breadth in the last third. When we say market breadth, we are referring to the technical measure of the market that gauges the strength or weakness of moves of major indices. Specifically, it refers to how many stocks are participating in each move in an index or stock exchange. Sometimes it can be difficult navigating these up and down swings, but historically, after having already experienced a significant correction, these types of movements can often project that markets are trying to find their footing/support and are often followed by strength as we will illustrate in the following charts.

We wanted to first backtrack to how oversold equities were in mid-June when less than 2% of stocks were above their 50-day moving average (some refer to this as market capitulation). See the chart below that shows these points in red where this was the first occurrence in six months. Shortly after that time, we opined that this was a strong set up for a summer rally. The S&P 500 went on to advance almost 18% on a total return basis over the following two months to mid-August. It has since pulled back from there, but we will discuss that next. In the table to the right, you can see how markets have historically performed the last 20 years over the following year after these occurrences, averaging a median one year return of 25% compared to 11% for all other periods. With all charts/tables that follow, we disclose that past performance is not indicative of future results.


Source: Bespoke Investment Group

Fast forward to mid-August, near the end of this summer rally. We wanted to point out that on August 12th, the up-volume on the S&P 500 was greater than 90% in two out of three days while it was below its 200-day moving average. This was the 28th occurrence since 1985. In 100% of these past 27 instances, the S&P 500 has been higher one year later with an average return of 19.3% with only a maximum average drawdown of 5.1%.

Sources: Jonathan Harrier, CMT @jonathanharrier, and MarketCharts

Also on August 12th, the S&P 500 closed at a level that was more than 50% off its recent peak to trough decline. This is a very positive sign historically. When this has occurred in the past, the U.S. large cap stock market has never moved back to new lows before reaching a new closing high. In addition, one year later, the S&P 500 has been higher 100% of the time over 15 occurrences since 1956 with a median return of 18.6%.

Source: Ryan Detrick, Carson

As we first noted, markets have recently pulled back from this rally, with very poor market breadth some days. This is somewhat concerning, but one positive sign is that it hasn’t occurred with an accompanying new low. On August 26th specifically, we saw a rare occurrence where the S&P 500 hit three parameters in the same day, where there was greater than 98% declining volume, where it was above its 50-day moving average and where it was below its 200-day moving average. This has only happened four times since 1985. As you can see, all observations were higher one year later with an average return of 19%.

Sources: Jonathan Harrier, CMT @jonathanharrier, and MarketCharts

In addition, earlier this week the S&P 500 printed a rare -13.7% on the McClellan Oscillator. This is a market breadth indicator that is based on the difference between the numbers of advancing and declining issues on a stock exchange. Since 1986, the S&P 500 has fallen below -13% only 15 times. The table below presents each of the 15 times it has occurred and the year-forward returns. In all cases, the market was higher one year later with an average return of 24.5% with an average drawdown of -8.8%. This could indicate higher volatility ahead, but one could take this positively in that this has occurred where the stock market is at a higher level than the June lows.

Sources: Jonathan Harrier, CMT @jonathanharrier, and MarketCharts

We will finish off this week’s charts with a look at recessions and how stocks perform before and after. Many people believe that once a recession starts, or even a few months prior, they should get out of the stock market. However, as you can see from the chart below, the stock market is a forward-looking mechanism. Once it becomes possible that a recession may be coming, the market begins to react negatively. And by the time it becomes evident that a recession is likely, the market is probably getting close to bottoming out, having already priced the recession’s implications into stock prices. Also, when recessions are formally announced by the U.S. National Bureau of Economic Research, it is usually well after the recession has started. By then, the market has often had a substantial recovery (one exception being 2001). Therefore, exiting from the equity markets when a recession starts, and buying back in when the recession is over, has proven to be a poor market timing practice historically.

Source: First Trust Portfolios Canada

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.

Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, First Trust Portfolios Canada, Jonathan Harrier, MarketCharts, Ryan Detrick