Gavekal Capital

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Gavekal Capital identified the Knowledge Effect and created the first investment methodology to capture the excess returns of highly innovative companies. Gavekal Capital is creator and designer of the Gavekal Knowledge Leaders Strategy, indexes and investment products.

Have Stock Market Internals Turned The Corner?

Several weeks ago, we noted that several signs had popped up that the worst of the rout in emerging market stocks may be behind us. So far at least, the market agrees as EM stocks have gained over 7% over the past three weeks. Today, we are going to go through a similar exercise but this time we are going to look at developed world stocks. Once again, at least according to our market internal data, it looks as though the worst of the decline is behind us.

Momentum has shifted from negative to at least neutral in the last week. Our blunt measure of momentum, which is the percent of stocks trading above its 200-day moving average, has increased off its oversold level of 16% on 9/29 to a six-week high of 35% as of Friday. Perhaps more importantly, the percentage of stocks trading above its 200-day moving average is now greater than the percentage of stocks that have its 50-day moving average above its 200-day moving average. This is what we tend to see at turning points in the market, especially when this occurs above the 20% oversold line.


Breadth in the market has been improving as well. Whenever there are at least 4 declining stocks for every 1 advancing stock we identify this as a distribution day and can safely say that breadth in the market was weak on that day. Conversely, whenever there are 4 advancing stocks for everyone 1 declining stock we identify this as an accumulation day and say that breadth in the market was strong. We have created a simple indicator, that nets out distribution days against accumulation days over three months time, and it gives us an idea of what has been going underneath the price changes in the market. Over the past three months, there have been  7 distribution days and 5 accumulation days for a net accumulation/distribution days of -2. As the chart below shows, this is a significant improvement since 9/28 when the indicator was sitting at -6. Also, a reading of -2 is squarely in line with the decade long range for this indicator. Finally, over the past two weeks we have experienced two accumulation days. The current 5 accumulation days over the past three months is the most since December 2013.


Market corrections are associated with a surge in the number of stocks making new lows. For example, on 10/10/2008, 65% of all stocks in the MSCI World Index made a new 200-day low. And on 8/8/2011, 50% of all stocks in the MSCI World Index made a new 200-day low. In our most recent market tremor, 35% of MSCI World stocks made a new 200-day low on 8/24. On 9/28, we had a slight surge again in new lows, this time 28% of stocks made a new 200-day low, but importantly the percentage of stocks making a new low didn’t surpass the percentage on 8/24. Also, we are starting to see a small creep up in stocks making a new 200-day high. Currently, only 3% stocks are making a new 200-day high. But as you can see in the second chart below, it takes a while before 10-20% of stocks make a new 200-day high after a correction. Also, already 51% of stocks currently have positive performance over the past 200-days.


Finally, while it may feel painful, “only” 29% of stocks are in a bear market over the past 200-days. This is well off the low on 9/29 when 54% of stocks were off 20% from the 200-day high. 70% of stocks are still at least in a correction but this too is also improvement from the low on 9/29 when 87% of stocks were in a correction. Importantly, the percentage of stocks that are off by 20% or more from its 50-day and 100-day high is improving as well. As the third chart below shows, lows in stocks come when these series all plunge lower together such as March 2009 and October 2011.


All in all, whether you look at momentum, breadth, new lows or at the number of stocks in a bear market, the market internal data for developed world stocks looks like it is on the mend.

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