With today’s performance, the S&P 500 eeked out the highest close for the year (+5.65%). Perhaps even more noteworthy was the concomitant rise in the S&P 500 index advance decline line.
You might recall that last month we looked at the cumulative S&P 500 index advance decline line as a preferred breadth indicator. This is a simple and effective way to side-step the NYSE breadth index which has become far too polluted with non-operating companies.
While the S&P 500 AD line relies on a much narrower sample of securities than the NYSE AD line, it is of much higher quality because it exclusively represents stocks - not bonds, ETFs, CEFs, etc. So if you are staring aghast at your monitor watching the stock market shrug off every single obstacle and climb higher, this is an important explanation.
The above chart is a short term look at the AD line - you can see two charts with longer time horizons here. Today’s close just barely passed last Tuesday’s (March 23rd 2010) high of 13213.
While the AD line suggests that the advance was ubiquitous, it is also important to note that the new yearly high was made mostly thanks to large caps. The S&P 500 index closed higher as did the S&P 100 index and the Dow Jones Industrial. But the NASDAQ Composite didn’t. Nor did the small caps, which is surprising given their recent bout of relative strength. So the market is hardly firing on all cylinders here.
In the end, all this tells us is that market breadth continues to lead or match the equity indexes. It is no guarantee against a short term correction. In fact given the current extremely optimistic sentiment, I’m not sure how many more points the S&P 500 can climb. Based on previous patterns, it is already on borrowed time.
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