Based on my own rules, I have been calling for an extension of the rally that began back in early June. And, sure enough, the Dow, S&P and Nasdaq have all made new bull market highs in the last few sessions. The DAX and FTSE have a way to go before they register fresh peaks, but are moving in the right direction.
Dow's new highs
I would have thought the technical case for being long at the moment was straightforward enough. But the contents of my mailbox betray a growing unease among other traders about the latest gains. "Rallying to resistance on ever-decreasing volume is not a sign of a bull market, it's the sign of a manipulated end-move," 'Kermitskrackers' informs me via Twitter. "Something is rotten here," whispers a leading CFD broker mate.
With respect to those involved, I see this as a clear case of letting emotion - in this case, moral outrage - dictate one's view of the market. From what I can tell, these arguments seem to be largely rooted in the belief that stocks are being driven artificially higher by big, nasty banks using a combination of virtually-free money and algorithmic trading systems.
S&P's shrinking volumes
Insofar as this supposed phenomenon has a manifestation on the charts, it is in the ever-decreasing number of shares changing hands in New York, London and elsewhere. As I have discussed here before, volumes have been shrivelling ever since March 2009, except during bearish periods, such as the sell-offs of the last three summers. Ultimately, though, volume is of secondary significance. It is the price-trend that matters most, and that trend is upwards.
As a counterweight to the bearish argument about volume, I would point out that breadth on the indices is in much better nick. Breadth is technical concept that captures how many stocks within an index are doing the same as the index itself. In a rising market, we'd expect most individual shares to be rising too, and vice versa in a falling market. If the index is rising, but breadth is falling, it is often a warning sign that all is not well.
FTSE's healthy breadth
My favourite way of tracking market breadth is with the advance-decline (AD) line. As of the very latest highs in the S&P and Dow, the AD line was also at an all-time high. The FTSE 100's AD line is also at an all-time high, while that on the FTSE 250 index is at a high for the current bull market. The only index making new highs on deteriorating breadth is the Apple-dominated Nasdaq 100. But I failed to be unnerved by this one - and long-standing - exception.
Nasdaq's breadth divergence
For now, therefore, my call remains that the bull market in equities is set to continue. I would not be remotely surprised to see the Dow advance upon its all-time highs at 14198 in the weeks and months ahead. In this environment, the FTSE could well make new post-2009 highs above 6100. If we get a shake-out in the near future, I shall treat it as a future buying opportunity.
