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What a difference a week makes. Just seven days ago I wrote about how the cumulative advance decline line of the S&P 500 index was not keeping up with the index itself. This, I argued was a cautionary sign that the rally did not have the support of most of the constituents of the major index.
Fast forward to today and we can see that the cumulative breadth measure for the S&P 500 is not only keeping up, it is now slightly leading the index:
I prefer this measure of the cumulative advance decline line because it eliminates the artificial effects of non-operating company issues that are usually interest rate sensitive. These interest rate sensitive issues have wreaked havoc on the traditional NYSE cumulative breadth indicator as bonds and bond proxies have rallied. But obviously, the cumulative breadth we are seeing from this indicator is the real deal.
Obviously my cautious stance of late was unwarranted as the bulls have simply run away with the market. Still, I’m having trouble wrapping my mind around the current rally. Not only are we seeing overbought levels in many technical oscillators, the simplest measure of price movement relative to trend suggests that the pace can’t continue.
The relative distance of the S&P 500 index to its own 50 day simple moving average hit 5.9% yesterday. The last time we had price this far stretched away from its medium term moving average was in April 2010. Then, it reached 6.4% on April 15th 2010 just as the market was topping out.
Of course, the market has not always topped and fallen when we’ve seen such a technical formation. But usually, when we see price move so far in advance of trend, the market needs to take a breather. At best stock prices go sideways to digest the advance. Or decline to retrace some of the gains in a profit-taking decline.
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