The last time we checked in on the cumulative advance decline line for the S&P 500 index, it was at a high. It managed to inch a little higher in the days that followed but unlike my expectations, it didn’t top out ahead of the index. Instead it peaked and has dropped concomitantly with the market. In fact, the top in the cumulative AD line corresponds to the S&P 500’s own top on April 23rd, 2010 at 1217.28 points.
Since then it has fallen along with the market, as you can see in the chart below, with one important difference. While the S&P 500 index itself has fallen to the levels we last saw a few months ago in February, the cumulative advance decline line is continue to hover significantly higher than where it was back then.
The S&P 500’s cumulative advance decline line was at 9248 on February 8th 2010 (the end of the correction). And during last week, it fell to a low of 11532 on June 1st 2010. So 2284 cumulative AD points separate the two dates. That is a significant degree; about 25% higher. Meanwhile, on the chart of the S&P 500 index, there is almost no difference since that index is basically where it was at the bottom of the February correction.
This important divergence tells us that market internals are telegraphing a hidden strength in the S&P 500. While based on points it is back to where it was 4 months ago, based on cumulative advance decline parameters, it is continuing to make higher highs (assuming the cumulative AD line recovers of course).
A Bullish Grey Beard
I keep track of several stock market gurus, or as I call them “grey beards”. The list is short, Warren Buffett, George Soros, Jim Rogers, David Rosenberg, etc.. These men have first hand experience of several market cycles as well as being serious students of the market. Of these, several like Steve Leuthold, literally do have grey beards. Right now, the head of the eponymous Leuthold Group LLC is staunchly bullish telling clients in a May 20th 2010 report to treat the weakness since April 23rd as a buying opportunity.
Doug Ramsey, Director of Research for the firm said in a recent interview: “There’s no way the European debt problems are going to be enough to derail the growth that’s taking place in our economy and in Asia.” He estimates the S&P 500 to climb at least 19% by year end.
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