FTSE 250's fresh buy
With quantitative easing still in full gush, I think it unlikely that a meaningful top in equities has been reached. And I would like to play the ongoing upside that I expect through the stronger-looking indices. For the UK, that means the FTSE 250 rather than the FTSE 100. The mid-cap market gave a repeat buy signal on its swing-chart on Tuesday 25 September. The S&P 500 and DAX are also in good nick, as far as I see it.
NYSE's bad breadth
I have made something of a habit of dismissing supposedly bearish signals on this page in the last couple of years or so, and rightly so for the most part. However, there is at least one negative omen right now that I would take more seriously. Breadth on the New York Stock Exchange is worsening. While the S&P 500 has been pushing to new record highs, my favourite indicator of market breadth - the advance-decline line - has not been.
Breadth is the concept that captures how many individual stocks in an index or market are taking part in the overall trend. When the index is going up or down, you would naturally expect many of its members to be doing the same. However, there are times when this does not happen. The market goes up even when a majority of the stocks that make it up are not. In other words, the market is being driven by a minority of heavyweights.
There are many ways to measure breadth. The advance-decline (AD) line is simply a running net total of how many stocks went up and down each day. Say a market has 1,000 members and 600 rise and 400 fall on a given day. The net figure is therefore 200, or 600 less 400. That net figure is added to or subtracted from the cumulative figure to date. The result is a line that one can plot underneath the price of the market to which it relates, as you can see here.
AD weakness hails 2007 highs
The NYSE's AD Line reached a high to date on 21 May this year, 128 days ago. Since then, however, the S&P 500 has made two more distinct highs, whereas the AD line has not. According to a study I did of the Dow, 12 of the 15 major highs in the market since 1928 have been been foretold by 'breadth divergence' such as this. On average, the peak in breadth came 279 calendar days ahead of the peak in the market itself.
Too early: S&P's 2000 top
Still, no sensible analyst would use breadth for trying to pinpoint tops. To see why, consider the dispersion of lead times. The AD line peaked 129 days ahead of the October 2007 high, but 651 days ahead of the January 2000 top. All we can say for now is that another warning light on the technical dashboard has switched from green to amber. I shall continue to respect the uptrend in price for now.
