Many participation indicators hit their lowest levels since April as equities sold off on Friday. How does the state of participation look given the weakening?
Friday was brutal for equities, seeing the S&P 500 (SPX) fall 2.7%—its worst single-day drop since the height of tariff concerns on April 10th. Tariffs continue to be a thorn in the market’s side, with Friday’s decline driven by news of a potential 100% tariff on China as trade talks continue. Fortunately, positive comments over the weekend saw the market recoup some of its losses on Monday. While headline movements like Friday’s selloff grab attention, understanding underlying strength requires a deeper look into the market’s health, which is where indicators come into play.
The NDW team utilizes participation indicators to identify whether movement higher or lower is broad based or coming at the hand of just a few names. Higher levels mean more stocks are “participating” or contributing to upward price action, which is a net positive for markets. Meanwhile, lower levels or a decrease in participation can signal weakening of strength. Downward action over the last week triggered notable shifts not only within major indices but also across many of our indicators.
Among the most sensitive metrics NDW regularly uses are the Ten Week indicators, which look at the percentage of stocks in a universe trading above their ten week moving average. The indicator is often the first domino to fall within our participation indicators but is more prone to head fakes given its sensitivity. Looking at the Ten Week for the S&P 500 (^TWSPX), it has gradually fallen from its heights in the upper 70s before moving sharply lower here in October. Prior to last week, TWSPX had stayed above 50% since May, with our current levels at 36% last seen in April of this year. Currently, the indicator is in “no man’s land,” as returns in this area can be muted. However, movement below 30 or 20 would be a sign the market is approaching washed out territory.
Due to their sensitivity, short-term indicators can signal initial change but gain more significance when confirmed by the movement of intermediate-term indicators. To evaluate intermediate-term participation, NDW uses “bullish percent” charts (BPs), which measure the percentage of stocks in a universe trading on a PnF buy signal. Similar to TWSPX, the bullish percent for the S&P 500 (^BPSPX) was slowly moving lower since peaking in July, with it falling even further over the last week. However, the overall levels for the indicator remain above 50%, meaning that a majority of the S&P 500 still trades on a buy signal. Given that things were in slightly elevated territory above 70%, some pullback from that range should have been expected, with our current position in healthy territory for now.
To confirm the movement of intermediate-term indicators, we compare them to the movement of long-term indicators. To evaluate longer-term participation, NDW uses the Positive Trend indicators (PTs), measuring the percentage of stocks trading in a positive trend on their PnF chart. Unlike BPSPX, the positive trend percent for the S&P 500 (^PTSPX) held relatively steady after pushing north of 70% in July. Even with recent action, the indicator has yet to reverse into a column of Os but is less than 1% away from doing so. Historically, environments around current levels have been constructive for equities. Most of the market’s gains occur when PTSPX is above 50%, and readings north of 60% are generally more positive, which is a positive sign for the market’s outlook.
Overall, the state of participation remains positive for domestic equities, particularly in long-term indicators. However, there are some initial signs of weakness as participation is moving in the wrong direction. With some cracks starting to form, the market’s ability to hold or improve current levels will be a crucial factor in whether we see a strong close to 2025.
