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The momentum driving the equity market higher has been relentless. The stock market has basically gone streaking - climbing higher barely giving anything back. Depending on how you look define it, this is rather rare in the market.
For example, from late February through to mid-March, the S&P 500 had a 17 day streak where it climbed higher without so much as losing more than -0.25%. The broader market index, the Wilshire 5000, also went on a similar 10 day streak in mid-March. To find a similar span of time where the Wilshire 5000 went up relentlessly like that we would have to go back all the way to 1995. Positive streaks like these may sound like a great contrarian indicator but usually after experiencing them, the market tends to trundle along comparable to average returns.
What has me worried is not the market’s wanton streaking, it is that the percentage of S&P 500 index constituents is once again at an extreme high. On Tuesday, 90% of S&P 500 index stocks were trading above their 50 day moving average. The last time this breadth indicator was higher was back in mid-September 2009 at 93%:
Based on this and other indicators (like the options trading activity and the amount of froth from speculative trading), I do think we are at or very close to a top here. The market may move ahead a bit more but like other times, it will quickly give that all back and more. As well, a simple resistance/support analysis of the S&P 500 finds the market very close to major resistance in the area of 1200. A similar resistance level is coming up for the Wilshire 5000 index in the 12,500 range.
By the way, we looked at the cumulative advance decline line for the S&P 500 index recently and today it closed at 13,213 - a new high for the year. So breadth is continuing very strong and much like the past little while, breadth continues to lead the market higher. If this is the silver lining for this indicator, then the grey cloud is that the cumulative AD line is now very close to 13,600-13,700 where it last crested in 2007.
While most are watching this unfold with mouths agape, when we look back through market history, the rally so far is not uncommon. Here is a chart showing all the past major rallies in the Dow Jones Industrial Index:
Source: Chart of the Day
There have been 27 rallies over the past 110 years which is about 1 for every 4 years (hence the four year cycle). Almost three quarter of these rallies provided a return of between 30%-150% lasting from 200 to 800 trading days. If anything, the one year old rally we are seeing now is a tad on the low range both from a time and magnitude perspective.
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