A Market Health Check as We Enter 2022

Last year proved to be boring and exhilarating by turns for investors...

2021 started with the mayhem of the GameStop craze. The Reddit-fueled short-squeeze sent the stock up more than 1,000%. And "meme stocks" have staged big swings up and down since.

Cryptocurrencies have had a heck of a year as well. Bitcoin was up 60% in 2021. And it doubled twice and crashed 50% along the way.

Meanwhile, the S&P 500 Index finished the year up 29%. And we saw practically zero volatility as stocks methodically marched higher.

The choppy action in December was about the worst we saw in 2021. The tech-heavy Nasdaq, spooked by news of the Omicron variant, fell 5% in a little more than a week. But it was back near all-time highs by year-end.

It has been an easy market to "buy and hold." And the returns have been fantastic.

You might even be spooked about that. It's not supposed to be this easy, after all. But don't let that fool you into thinking stocks are bound to suffer in the new year.

Instead of worrying about what could happen, let's take a look at the overall health of the market to see what's likely in 2022. Today, I'll share two indicators that show us the bull market is in a prime position to continue...

To check the health of the market, we want to check under the hood and make sure things are in good shape. One of my favorite ways to do that is with the advance/decline line...

We've started calling this our "Melt Down Indicator" in our True Wealth newsletter. It's only one way to look at market health, of course – but it's an important one. That's because it has flashed massive warning signs before previous stock market Melt Downs.

This indicator gives us a look at "market breadth." That's a way of gauging when lots of stocks are doing well, not just a few.

In the case of the advance/decline line, it's a cumulative daily measure of stocks moving up, minus those going down. If 500 stocks are up on the day and 200 are down, the advance/decline line will be positive by 300.

So, when this measure is rising, it means more stocks are winning than losing. And that's exactly what we want to see. Despite a recent dip, the advance/decline line remains near all-time highs today...

The red flag will be if the S&P 500 is rising, but the advance/decline line is falling.

That's what happened during the dot-com boom. And that divergence spelled eventual doom for the market. It showed that only a few stocks were carrying the market higher.

Today, though, this measure of market breadth says stocks can continue higher.

Another way to see this is the S&P 500 Equal Weight Index...

You see, in the normal S&P 500, larger companies have larger weights... In fact, the top four companies make up more than 20% of the index today.

That means those few companies are crucial for the index's success. But what if they're rising and everything else is falling? The index could keep rising... but it'd be a darn unhealthy market.

The Equal Weight Index lets us look under the hood and see if that's happening. It holds all 500 companies in equal weight. And when it rises alongside the normal index, it means most stocks are doing well.

That's still the case today. Take a look...

This index had a banner year, just like the overall market. It was up 30% last year. And it moved back near an all-time high – just like the normal S&P 500 – by year-end.

That tells us, again, that the bull market is healthy today.

Make no mistake – the kind of rally we saw in 2021 is unusual. But don't let that scare you into thinking bad times must be around the corner.

The market mania we saw at the beginning of the year has mostly faded. And our breadth indicators tell us that stocks are in good shape. That means we can expect more gains from here as we head into 2022.

Good investing,

Brett Eversole

Further Reading

You might think a big drop is right around the corner. But bull markets don't crash just because they've been going on for a long time. And one sector could outperform as the rally continues... For more, read Chris Igou's two-part essay here and here.

"Stocks were overly loved," Steve writes. "But now, that incredible optimism is completely gone." And investors changing their minds this quickly means the Melt Up could run longer than anyone expects... Learn more here.

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The bull market is humming along. So it's important to stay long on stocks today. And Matt has found one company on the cusp of massive growth as digital trends continue...

Market Notes



PNC Financial Services (PNC)... financial services
M&T Bank (MTB)... regional bank
Aflac (AFL)... insurance
CVS Health (CVS)... drugstores and vaccines
Procter & Gamble (PG)... consumer goods
Kimberly-Clark (KMB)... consumer goods
McCormick (MKC)... spices
Coca-Cola (KO)... soft drinks
Tyson Foods (TSN)... beef, chicken, and pork
McDonald's (MCD)... burgers and fries
Flowers Foods (FLO)... bread maker
Hershey (HSY)... "Global Elite" chocolatier
Union Pacific (UNP)... railroads
Viper Energy Partners (VNOM)... oil and gas
ExxonMobil (XOM)... oil and gas


NovaGold Resources (NG)... gold
First Majestic Silver (AG)... silver
Kratos Defense & Security (KTOS)... "offense" contractor
BlackLine (BL)... cloud-based accounting software
CRISPR Therapeutics (CRSP)... gene editing