There are some Cracks in the Bull Market.

Keyword: Cracks.

And just as important, keyword: Bull Market.

Context matters.

The S&P 500 peaked roughly a month ago, participation has deteriorated, and plenty of stocks underneath the surface have been taking hits.

But zoom out and the broader regime has not changed.

The weekly trend remains higher, weekly RSI remains in a bullish regime, and more than half of S&P 500 stocks remain above their 200 day moving average.

Cracks matter, but cracks are not the same thing as a break.

That distinction frames everything else I am watching right now.

Let’s get into it.

Every week I look at the percentage of stocks above their key moving averages.

Think of it like stepping on a scale.

One measurement tells you where you are.

Repeated measurements tell you where you are going.

And right now, breadth is going the wrong direction.

The deterioration is most obvious across the shorter term measures.

The 20 day columns have weakened substantially, weakness is beginning to spill into the 50 day numbers, and areas like Consumer Discretionary, Industrials and Financials have taken meaningful hits.

Looking month over month makes the deterioration even clearer.

Technology and Energy have been relative bright spots, but broadly speaking, participation has narrowed.

So we have two separate observations:

Breadth is weak.
Breadth is getting weaker.

Neither is particularly bullish.

But weak breadth is also how oversold conditions are created, and within the context of an underlying uptrend, those oversold conditions can eventually create some of the better entry points.

The key word is eventually.

You are going to hear the word "oversold" a lot when markets get messy.

By itself, I don't find that especially useful.

Oversold is not the signal. The reversion from oversold is the signal.

Something can always become more oversold.

Buying simply because breadth, momentum, or price has reached an extreme gives you very little information about whether the selling pressure is actually finished.

The reversion changes that.

When breadth becomes washed out and then starts to recover, you finally have evidence that buyers are stepping back in.

More importantly, that recovery gives you a platform to manage risk against.

Instead of trying to catch the exact bottom, you are waiting for the market to show some follow through first.

If that follow through fails, you have a much cleaner level through which to get out.

Oversold tells you conditions are stretched.

Reversion gives you something to trade against.

That is the distinction I care about.

One of the models I have been working with looks at the percentage of S&P 500 stocks above their 20 day moving average while the broader trend remains bullish. Specifically, I am watching for breadth to fall below roughly 30%, then recover back above it.

The first move tells me things are washed out.

The second move tells me the market may actually be starting to repair.

I am not trying to buy the beach ball simply because it is underwater. I want to see it start coming back toward the surface first.

That patience can mean missing the exact low.

That is fine.

I would rather give up the first few percent of a move in exchange for better evidence and cleaner risk.

The next step is straightforward.

I want to see breadth stop getting worse.

Then I want to see it begin improving.

That means more stocks reclaiming their shorter term moving averages and some of the areas that have been hit hardest beginning to participate again.

Industrials, Financials, Materials and Healthcare are all areas I am watching closely because these are exactly the kinds of groups that would need to improve for breadth to meaningfully recover.

Some of those charts are ugly.

That’s okay.

Mean reversion setups usually are.

The important part is not whether the chart looks pretty.

It is whether price begins confirming the reversion and whether there is a clearly defined level that tells me I am wrong.

I do not need the bottom.

I need evidence that the bottom might be behind us.

The market has cracks.

Breadth is weak and still weakening.

But the broader trend remains higher.

Those things can all be true at the same time.

That is why I am not interested in blindly buying weakness, but I am also not interested in extrapolating weak breadth into the end of the bull market.

For now, the job is patience.

Let breadth get washed out.

Let the market begin to repair.

Then use that reversion to define risk and selectively put capital back to work.

Do not buy because something is oversold.

Buy when oversold starts acting better.

If the reversion fails, get out.

If the cracks spread into the longer term trend, reassess.

Until then, respect the weakness without forgetting the regime.

Anyway, that’s my two cents.

Check it out.

🚀 Throw it on 1.5x speed and let it rip.

👍 Give it a like. It’s the easiest way to show me some love.  

The Sunday Stalk List

Tomorrow, I’ll break down more of what I’m buying in the Sunday Stalk List.

If you want clean charts, clear setups, and tactical insights, this one’s for you.

It hits your inbox every Sunday so you know exactly what to stalk for the week ahead.

Cheers,

Larry Thompson, CMT CPA

Follow Me On Twitter (X)

Follow Me on StockTwits