When we look at the entire universe of NYSE issues, and generate an aggregate percentage number for the number of issues which are above or below the longer term moving averages (50 day and 200 day) we can draw some conclusions about the behavior of the entire market in the same way. In bullish market behavior, the percentage of stocks above their long term moving averages will be in the upper half of the range (50% to 100%) and conversely in declining markets.
We need to remember that when the price is above its moving average, the value of the moving average increases, at a slower rate but it follows the trend. At high and low extremes, the price behavior flattens out or spikes and reverses. This type of price behavior will slow the rate of change of the moving average causing it to curl over and flatten out. While a few stocks can have long extended trends in one direction or another, is extraordinarily rare for the market as a whole to do this, there are always some stocks which start behaving in a direction counter to the market trend.
Therefore at market extremes we need to be sensitive to occasions when this indicator is also at an extreme. In the two charts I filled in with red the areas below the 50% line.
During the 2002-2003 market bottom, this indicator was below the 50% level at the end of the decline, indicating a time lag between the stocks which initially caused the market averages to decline, and the 'other' stocks which resisted the decline until late in its development.
In the current decline, the price behavior of a much larger number of stocks started to deteriorate much earlier in the correction phase. The large number of issues in negative trends (below the 200 day and 50 day moving averages) started much closer to the index highs than it did in the 2002-2003 period. While this indicator is now starting to reach extremes which are starting to be unsustainable it is also unlikely that the markets will just turn on a dime and move higher.
Not all stocks will bottom at the same time, and over the next two or three months, this indicator can give us a better indication on whether the trend is going to change or not.