Something to Keep An Eye On (Market Breadth)
These two charts are very interesting in that they may be showing a weakening bull market. The first chart is the Russell 2000 Advance/Decline Line. It shows that while equities have rallied to new highs, breadth has not matched the strength of the price action. The second chart is the %age of Stocks Above the 200 Day Moving Average. Same story here, recent market highs have not seen the same number of stocks showing bullish price action. These are signs of declining breadth and it’s worth watching closely to see if it corrects, or if something more nefarious is amiss.
I believe that equity markets will begin to rollover at some point this year. There are numerous headwinds and dangers that lurk in the investment waters ahead. Emerging Market inflation is beginning to become a big problem, particularly in China (another potential headwind I analyzed almost 1 year ago). The Eurozone also has its problems and they seem to be progressively getting worse. It seems that recent discussions among politicians over there haven’t ameliorated the increasingly edgy bond markets. Throw in there reduced spending from the US government (another topic I covered here), a double-dipping housing market (which is in my thesis as well), and increasing commodity prices as investors continue to poor money into raw materials due to fears of the Federal Reserve destroying the value of the dollar (think summer 2008); and you have an environment fraught with risks that are not being correctly priced into the equity market. Complacency is rampant and most analysts are expecting continued recovery and rising stock markets. What was that what Warren Buffet said?
“Be fearful when others are greedy and greedy when others are fearful.”
Charts Courtesy of freestockcharts.com