A perfect advance decline line is not always good news.
This morning the market opened and the breadth was stellar. Holy crap, 85 advancers in the S&P 100. Full-blown correlation to the upside.
Every sector was bid. Retail was up because it’s retail, materials hell yeah, healthcare back on that pony.
Even the home builders had a bid under them, which is the one that kills me.
Financials gapped a full percent for doing nothing at all. Turns out you don’t have to be good. You just have to show up.
That is the kind of tape that makes people feel safe. It should not.
Everything was up except one group. The semiconductors were getting smoked. Micron down almost 6% at the bell, AMD off 3.5%, and Nvidia and Broadcom getting sucked in with them.
The semiconductors have been driving this bus all year. They are the leadership.
So what you had was not buying. It was money running out of the leadership group and hiding in everything else. That’s a forced rotation, and it dressed itself up as a beautiful advance decline line.
Every time lately that I have seen breadth this good, the market has reversed to the downside later in the session.
You look at a number like that and think, why would I ever short an advance decline line this strong? And the answer is that the strength is telling you where the money left, not where it went to work.
So the number by itself is worthless. What matters is who is in it.
Breadth is bullish when the leadership group is participating. When the leaders are the only thing red and everything else is green, that is not confirmation. That is an exit disguised as a rally.
The test takes about ten seconds. Pull up the advance decline line, then pull up whatever group has been carrying the market. If they disagree, believe the leaders.
There is a second version of this that runs the other way, and I saw it last week.
The market ripped 130 points and the advance decline line closed negative. Like how many people caught that? A handful of names carried the entire tape while most stocks fell.
Same lesson, opposite shape. Breadth without leadership means nothing, and leadership without breadth means nothing.
Dogs and cats living together. We are a mess right now in this marketplace.
None of that tells you the market goes down tomorrow. What it tells you is that a green screen and a strong breadth number are not the same thing as a healthy tape, and if you trade off the screen alone you are going to get run over by a rotation you never saw.
To your success,
Don Kaufman
P.S. Before I trust any rally, I run through this checklist. It takes about two minutes and it is built specifically to catch the setups that look strong on the surface. Tomorrow morning, run it before the bell instead of after.
