Nothing is wrong with stock market indices making brand spanking new all time highs. Investors buy stocks in the hope that the price will be higher than what it was when purchased. It’s what gets talked about by financial media types and President Trump points it out without fail on his Twitter feeds and at his rallies.
Here’s some cold water to pour on the whole thing: 3 indicators used by price chart analysts to gauge the underlying tone, if there is one, to the popular higher highs reporting. Markets have a way of continuing on sometimes without regard to anything or anyone, but investors ought to be aware of these caution flags.
NYSE Advance-Decline index, weekly, 11 27 19.
When the stock market came off the Christmas Eve, 2018 lows, the strength of that rally was confirmed by this New York Stock Exchange Advance-Decline Index. That high point on the chart indicates the enormous number of advancing stocks had swamped the dwindling number of declining stocks.
The combination of a S&P 500 rally and a NASDAQ Composite rally along with an extreme high advance-decline reading was a strong positive. In fact, its predictive value proved correct as the broad market indices continued to rally for months and months.
So, what’s the problem? It’s that the each new high on the price charts of the stock market indices is accompanied by a lower reading on the advance/decline index. That is, fewer and fewer stocks advanced as the months rolled on. More money going into fewer hot stocks without broad participation is not a positive.
S&P 500 Bullish Percent Index, weekly, 11 27 19.
This S&P 500 Bullish Percent Index shows the percentage of stocks in classic bull patterns on point-and-figure charts for each one. You can see that at the beginning of 2018, about 82.5% of stocks made the grade. After dipping to less than 17.5% at the end of that year, a rally took the index back up to about 80%.
Right now — with higher highs in the s&P 500 than those 2 previous peaks — the Bullish Percent Index can only make it back up to almost 74%. This measure of strength confirms the failure of the Advance-Decline Index to keep up. It’s another negative divergence from price.
It’s odd to see former leaders unable to hit new highs along with the broad market indices — especially in what had been tech and internet favorites. Here are price charts for 2 examples of such stocks:
Facebook weekly price chart, 11 27 19.
New all time stock market highs in the major indices but Facebook can’t quite get there? It’s peculiar.
Amazon weekly price chart, 11 27 19.
Major component of the NASDAQ Composite and while the index itself makes the “all time highs” news, Amazon fails to achieve its own new high?
As we head into the year end, you may want to consider closely these 3 factors — the advance-decline issue, the bullish percent issue and the inability of former leaders to keep up.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.