The unstoppable march of the stock market higher continues unabated. There are obviously several things we can point to to show that this doesn’t make any sense. For example, the persistent and extreme bullish sentiment indicators which have been completely ignored so far.
If we simply look at the superficial numbers for the indexes like the Russell 2000, Dow Jones or the S&P 500, the market seems to be flying too close to the sun for its own good. But a close inspection of the underlying forces suggests that the health of the cyclical bull market is intact.
Let’s start by looking at the breadth as measured by the cumulative advance decline numbers. First, the NYSE cumulative advance decline which shows an astonishing rise to all-time highs:
Compare and contrast the clear uptrend we are seeing now with what we saw in the fall of 2007 (the blue downtrend line). The divergence back then was a warning that while the headline numbers were going up, the index was hollow – supported by fewer and fewer constituents. As the NYSE cumulative breadth hits all time highs, there is no divergence in sight.
The S&P 500 index’s cumulative advance decline shows a similar but somewhat less supportive scenario:
Again, while the large cap index’s breadth was stagnant in 2007, today it is rising along with the market itself. And at times, it is leading the charge. Usually at market tops we see a dwindling leadership as individual stocks start to sell off well before the index itself tops out. So as long as the bull market remains a plebeian one, then we can’t really find fault with it or to expect a major top.
The number of new highs in the Nasdaq market relative to new lows is not showing an over-the-top frothy market:
And finally, the distance of the S&P 500 index from its own 200 day moving average is elevated but not at historic levels. By the way, don’t confuse this with the percentage of S&P 500 index components that are trading above their 200 day moving averages. I’ve discussed this a few times previously, for more, see: What Happens This Far Above The 200 Moving Average?.
As of today, the S&P 500 index closed at 14.4% above its long term trend. To put that in perspective though, historically, the stock market has not been able to go beyond 20% above its 200 day moving average. The highest level recorded (since 1950) was on October 20th 1982 at 23%.