80 - 60 - 40 Rule Spells Correction

One of our favorite indicators of equity market conditions looks at the percent of stocks within a market that are trading above their long term moving averages (% above the 30 week MA). After hitting a recent high at over 86% in January the % above the  30 dropped to below 60% this week indicating that market breadth is waning.

According to work done by our friends at Dorsey Wright and Associates, of 17 occasions this occured since 1970, the indicator fell to below 40% before the correction had run its course in all but one of the instances. In some cases  this measure of market breadth ultimately fell to between 10 and 30% by the time it was done.

16 of 17 occasions over 40 years is a powerful statistic. This would indicate that there could be considerable room for this correction to run before we set up for the next sustainable rally.

Given this and other global equity risk indicators that point to correction, the various Barometer equity mandates currently are playing defence with a significantly reduced equity exposure and an elevated cash weight.