This 'Melt Down Indicator' Shows Stocks Aren't Peaking Yet

How do you know when a bull market is close to ending? What's the simplest way to describe it?

How about this: A bull market is close to ending when more stocks are going down than going up.

I have tested hundreds of systems to figure out what works in the markets. It can get complicated. But I also like to keep things simple whenever possible... And this "stocks going up versus stocks going down" system is as simple as it gets.

Today, I'll share a simple version of this idea and explain what it says about the market right now...

We've dubbed this system the "Melt Down Indicator" in our office. It's that powerful.

It's called the advance/decline line. It's about as "dumb" an indicator as you'll ever find...

You simply add up the number of stocks that went up in a day, then subtract the number of stocks that went down. That's it. The advance/decline line is a running daily total of that number.

This gives us a gauge of overall "market breadth" – which simply means that lots of stocks are moving higher at the same time.

In a healthy market, breadth is strong. Stocks across the board are driving the market higher. When this starts to break down and only a handful of stocks are rising, that warns us of a dying bull market.

So just to review... when more stocks are rising than falling, the advance/decline line goes up. And when more stocks are falling than rising, the index falls.

If you look back at history, you'll realize this is an important signal near market peaks. In those times, the overall market tends to go higher... while the advance/decline line breaks down.

It happened just like that in 2007...

You can see that the advance/decline line peaked in the summer of 2007. But the S&P 500 Index marched higher, before peaking in October.

That divergence was a major warning sign for investors. And we saw the same thing happen during the dot-com boom...

This was even more extreme. This Melt Down Indicator was crashing for years before stocks eventually peaked. And that was an incredible warning sign for anyone paying attention.

We'll likely see a similar warning before the end of this bull market. Fortunately, we aren't there yet.

The advance/decline line is still near all-time highs today. Take a look...

As you can see, it's still hovering around all-time highs. The market is healthy. Lots of stocks are winning... And that means the boom can, and likely will, continue.

That gives me confidence that the Melt Down won't show up so soon. You can still invest safely right now.

This isn't the only way to measure "stocks going up versus stocks going down" though. Tomorrow, I'll share another incredible setup... one with a perfect record in a certain group of stocks.

Good investing,

Chris Igou

Further Reading

When everyone is all-in on stocks, it usually means a crash is imminent. That was the case earlier this year, but perception of the stock market has changed. And that means stocks can go much higher... Get the full story here: Why I No Longer Expect a Market Crash This Year

Wall Street professionals expect a drop in corporate profits. That might sound like a bad sign for the Melt Up, but it doesn't mean stocks won't continue to outperform in the coming months... Read more here: Profit Expectations Crash... Here's What It Means.

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