Recently I posted a number of articles on various breadth diffusion indicators and their relative effectiveness in predicting the health of the S&P 500. The big winner was the system that compared the number of stocks in the historical constituents of the Russell 3000 that were up 30% or more over the last quarter (60 trading days) vs those were 30% or down over the same period. You can read the whole series here.
The breadth diffusion value is computed as (up30 / (up30 + down30))*100. Suffice it to say, we have been seeing very low numbers recently. The current value is 8.2. So I thought I’d go back and see what those low numbers have foretold in the past.
Looking at the period of 1/1/2000 through 12/31/2015, we have had only twenty times that the diffusion value has dipped below 10. Below you can see all 20 of them, with the diffusion value, plus the 5, 10 and 20 day gain/loss for each instance:
The average 5-day gain/loss of the S&P 500 is 2.9365%, while the average 10-day G/L is 5.4655% and the 20-day G/L average is 6.3975%. The 5-day period following such a low diffusion number has been positive 75% of the time, the 10-day period has been positive 90% of the time, and the 20-day period 80% of the time.
All that to say a bounce seems likely.