A few weeks ago, I showed everyone how to use the cumulative advance/decline chart to read the breadth of the markets - the number of stocks moving higher or lower.
It's easy: The more stocks participating in the move up, the broader the breadth, and the healthier the broad markets are.
At the time, the breadth was robust, but it's been shrinking just a little over the past two weeks. Last week, in fact, I got in touch with my paid-up Stealth Profits Trader subscribers to let them know about an early divergence in the cumulative advance/decline line.
It's lessened over the past week or so, but it's still there.
That's significant.
Now, it'd be foolhardy to look at the divergence and panic, but it shouldn't go ignored, either.
Let me show you what I think it means - and what could be coming around the corner...
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It Would Be a Mistake to Change Posture Now
The markets continue to grind higher thanks to good economic news out of Europe, China, and Japan, as well as continued strong earnings here in the United States.
A market making new highs without the breadth making new highs is still an early warning sign - but it's just that - an initial "heads-up" as a slow-moving indicator to keep an eye on.
That divergence could still resolve itself positively, and only time will give us the answer. If it's still there two or three weeks from now, it'd be time to think about taking a bearish-defensive trading posture and looking to profit on stocks as they come down.
Until then, it's bullish business as usual.
And the folks over at Pension Partners LLC have put together some pretty compelling support for our continuing "Trump Growth" narrative.
We're Not the Only Ones with a Bullish Outlook
I couldn't resist sharing it with you all today, because it really provides independent confirmation of some of the bullish forces I've been talking about (quite a lot, I'm happy to say) pushing these markets higher and, if you're following along in Stealth Profits Trader or The 10-Minute Millionaire, dictating our trading bias.
Two extraordinary "hooks" set to rocket higher – thousands in gains possible…
Outside confirmation is always welcome, so here's a quick look at what's going right in the markets:
- Barring some unforeseen event, we're closing in fast on the ninth straight year of gains for U.S. equities, tying the record from 1991 to 1999.
- The Dow is on pace to hit the most all-time highs in a single year since 1995.
- The "story stocks" (they mean the "FANGs" here: Facebook Inc. (Nasdaq: FB), com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX), and Alphabet Inc. (Nasdaq: GOOG), Google's parent, are posting enormous gains and beating all expectations.
- The Federal Reserve remains extraordinarily dovish on rates (1-1.25%) as do central banks globally (negative policy rates across Europe and Japan). One of their primary objectives continues to include asset price inflation ("wealth effect").
- On the policy front, investors have been promised massive tax cuts, unending deregulation, and a boom in infrastructure projects, and they are responding with all due optimism.
And Pension Partners confirms there's a tailwind pushing the broader economy, too.
- Earnings are at a record high, and profit margins remain near their highest level in history.
- The unemployment rate (4.2%) is at a 16-year low.
- Jobless claims are at their lowest level since 1973.
- The U.S. economic expansion, at 99 months, is the third-longest in history.
- Manufacturing (ISM) sentiment is at a 13-year high.
- Consumer confidence is at a 17-year high.
- Housing prices nationally continue to hit record highs, gaining 6% in the past year.
- Average hourly earnings are up 2.9% in the past year, their highest level of the cycle.
- Inflation remains low, with core CPI below 2%.
And if we wanted even more confirmation of our "Trump Growth" narrative, just look at what happened on Friday: When House Republicans put forth details of their tax plan... the market dropped as investors "sold the news," just like you'd expect. Then they recovered strongly and pushed all-time highs again.
The diverging market breadth shouldn't be ignored, but markets just don't fall out of bed (20% or more) from all-time highs.
So, yes, the bull market is old. And yes, we're due for at least a modest pullback, but the cumulative advance/decline line doesn't say we should expect that just now, just that we should keep our eyes peeled.
Let's let the market tell us what to do next. And right now, it's telling us to stay bullish.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.