Indicator Warns It May Be Time to Start Preparing for a Bear Market

Markets change character slowly. The transition from a bull market to a bear market takes time to develop as a top forms. By the time the bear market is confirmed, many stocks are already showing losses. To spot potential turning points, technical analysts look at breadth indicators to signal when a large number of stocks are showing losses.

Breadth indicators measure how many individual stocks are moving in the direction of the market trend. In a bull market, we would expect to see most individual stocks moving up. In a bear market, most stocks will fall. As stocks transition between the two phases, breadth provides important clues about what should happen next.

There are a number of ways to measure breadth and many of them are complex. Analyzing breadth usually involves looking for divergences between the indicator and the price action. Divergences occur when the indicator fails to confirm a new high or low in prices. There are a number of ways to define divergences, and most are subject to the assumptions of the analyst.

While breadth can be difficult to interpret, we always try to look at things from the simplest possible perspective. The table below shows how many stocks are in downtrends based on the 200-day simple moving average (SMA):  (more)

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