Stocks are breaking out... and so is a key metric that tracks the underlying health of the market.
This is an important signal. You see, even an ailing bull market can keep climbing – at least for a while. But that's also an omen of more pain to come.
Fortunately, this market is thriving. As I'll explain today, one sign shows us the rally is healthy. More important, we can expect it to continue...
We'd never expect a doctor to diagnose us with a cursory glance.
Sure, they might be able to figure out a few potential ailments that way. But a once-over can't diagnose major illnesses like cancer and heart disease.
We expect a thorough examination before we get a clean bill of health. And it's no different with the stock market.
The market might appear healthy when it's hitting new highs... But we can only be certain by taking a deeper look at its "vital signs." We want to see what's going on under the surface.
One way to do that is to see what most stocks are doing. Specifically, are more of them going up than going down?
We can use the advance/decline line to answer that question. This cumulative measure of market breadth tracks the number of stocks that went up minus the number that went down on a daily basis.
So if 300 stocks moved higher and 200 fell, then the advance/decline line would increase by 100 that day. Over the long term, we get a cumulative measure that shows us when most stocks are rising or falling.
That's important... because throughout history, the advance/decline line has turned lower before the market started to fall. Here's how it looked during the dot-com peak...
The advance/decline line peaked in early 1998. That was more than two years before the overall market topped out. And the advance/decline line collapsed during those two years... So despite the boom, the majority of stocks were falling.
It was a clear sign that the rally wouldn't last long.
This is how we can tell whether the current bull market is healthy or not. We can only trust new highs if the advance/decline line is rising, too.
And that's what's happening right now. Take a look...
The advance/decline line broke out at the end of 2023. It failed to make highs again in mid-January as stocks hit new all-time highs. But now, it's back on the rise...
The advance/decline line is breaking out again. And while it hasn't yet eclipsed the all-time high we saw in 2021, it's clear that most stocks are rising right now.
Our "patient" – the market – is doing just fine.
That could change, of course. So we'll keep tracking this and other market indicators in case they start breaking down.
But for now, stocks are hitting highs in a healthy way. And that's more reason to be bullish.
Good investing,
Brett Eversole
Further Reading
"Stocks don't have a history of crashing after hitting new all-time highs," Brett writes. In fact, history tells us prices are likely to continue moving higher from here. And until the trend reverses, it's a good idea to stay invested... Read more here.
The market had an incredible run in 2023. And the gains didn't stop there... Stocks finished in the black last month. According to history, strong performance is likely to continue after a positive January... Learn more here.
