I got a great question from one of my Cycle 9 Alert subscribers recently. Chuck C. asked:
“It’s been said most stocks are in a correction, so why are the averages near all-time highs?”
Chuck’s right! Most stocks are in a correction. And, yes, the S&P 500 index is also near its all-time highs. (Psst… that’s a warning sign!)
But stock market averages are only “healthy” when a majority of individual stocks are healthy. We have to see both the stock market index rising… and a majority of individual stocks rising to know the market is bullish and healthy.
So if a majority of individual stocks are falling… even if the stock market index is rising…
Then trouble is likely ahead.
This chart shows the percentage of individual stocks in the S&P 500 that are currently above their 50-day and 200-day moving averages.
Prior to the rally of the last six weeks or so, a full 91% of stocks in the S&P 500 were below their 50-day moving average… and 78% were also below their 200-day moving average.
That’s about as bearish as these figures ever get!
Of course, this S&P 500 rally has sent the index back up to 2,100 – near its all-time high.
But it has NOT favored all stocks equally.
Because for the last two weeks, while the S&P 500 index has risen, the percentage of stocks above their 50- and 200-day moving averages has fallen.
What’s more, most stocks in the S&P 500 are still below their 200-day moving average. This suggests that the market’s rally is weak, since it’s being supported by fewer and fewer individual stocks.
We’ve seen this before…
This pattern of (1) a sharp sell-off, followed by (2) a sharp rally, with an overall weakening of individual stocks… is exactly the same pattern we saw in 2011.
Back then, the S&P 500 rallied until about 50% of individual stocks were once again above their 200-day moving average… then it rolled over for the next four weeks, losing 10% in short order.
So if the current market continues to follow the pattern of 2011, we’ll see weaker stock prices over the next two to three weeks.
There’s one key difference this time around.
The current bull market is now almost seven years old. So while stocks ultimately rallied out of the 2011 correction, the bull market was then just over two years old and valuations were much more reasonable than they are today. Bullish investors might not be so lucky this time around.
Either way, I’m finding a number of short-term opportunities right now.
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research