The S&P 500 – arguably the world’s most-followed stock market index – closed at an all-time high of 1,706.87 yesterday.
This milestone naturally led me to wonder, “Are we in this alone? Or do other markets confirm the S&P 500’s strength?”
If you’ve read my work for any time, you’ll know I use technical analysis to spot convergences and divergences in major markets and market indicators. Basically, convergence, or confirmation, occurs when one market’s new highs happen along with new highs in other markets. This observation adds validation that the new high isn’t a once off event, or a lone wolf lost from its pack.
Divergence, on the other hand, signals that something is amiss. If one market makes new highs, but all others look weak, you must view the high market with a suspicious eye.
I wasn’t the only one asking this question. Tom McClellan, renowned technical analyst and editor of The McClellan Market Report, wrote on this subject recently. His conclusion: U.S. equity markets are alone in making new highs. The rest of the world is lagging behind.
At first glance, this is a bearish signal… condemnation of the strength of U.S. markets… a warning that, unless other stock markets catch up, U.S. markets are due to falter.
And this is a valid concern.
However, there’s another way of looking for confirmation of the new S&P 500 highs. That is, look at other U.S. market indices like the Dow Jones Industrial Average and the Russell 2000. Each of these, like the S&P 500, is trading at all-times highs as well.
Even better, I look for confirmation in market indicators, some of which I’ve shared with you before.
First, the “happy shopper” indicator, which is a comparison of the consumer discretionary and consumer staples sectors. Outperformance of the former indicates consumers are optimistic and spending money on non-essentials. Investors are willing to take on more risk in return for potentially higher gains.
Here’s a chart showing the “happy shopper” indicator using the ratio (XLY:XLP). As you can see, it’s making new highs… a bullish signal, confirming the new all-time price high in the S&P 500.
The same theory applies to the relationship between small cap and large cap stocks. A ratio of the Russell 2000 (small caps) and the Dow (large caps) shows investors’ appetite for increased risks and returns. A rising trend is a bullish signal.
Here’s that chart…
Here, confirmation is somewhat mixed. The ratio has made a new high, in the short term, but is still a bit below the all-time high it made in early 2011. Overall, this is still bullish so I’ll be watching for a new all-time high on the near horizon.
What’s the point?
U.S. markets remain the best place to be. Whether that’s on an absolute basis, or on a relative basis – a la, the “best house in a bad neighborhood” argument – buying U.S. stocks is still the way to go.