We all know that stocks are a leading indicator of economic growth and disappointingly recent breadth measures suggest that economic activity may slow over the next several months. In the charts below, we show the percentage of stocks trading above the 200-day moving average for various market aggregates, regions and sectors (with a 1-quarter lead) against the 3-month moving average of the ISM Manufacturing Index. Equity breadth tends to directional lead changes in the PMI. So if equity breadth is increasing, the PMI tends to accelerate. Unfortunately, the fact that equity breadth has been declining over the past couple of months is pointing to a possible slowdown in the ISM Manufacturing PMI.
The percentage of developed market equities trading above the 200-day moving average has fallen from 77% on 9/22/16 to 50% as of yesterday. By region, breadth is best in DM Americas (59%) compared to 53% in DM Asia and just 36% in DM EMEA. The consumer sectors of the market (consumer discretionary, consumer staples, and health care) look particularly weak. Just 29% of DM consumer staple stocks are trading above the 200-day moving average. The DM consumer staples sector has only been this oversold twice during this recovery. DM information technology and DM financials offer the most optimistic perspective, but even in these sectors breadth has declined over the past several months.
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