Advance/Decline Line Shows Rally is Alive and Well Despite Doomsday Headlines

When everybody is bullish, where is their money? Pushed in the market without the reserves to buy pullbacks aggressively. When bullish market sentiment reaches climactic levels and people are fully invested in equities, those are the moments when you need to be extra careful.

There is a misconception that this market has been straight up since the March 2009 lows. bottom. Nothing could be further than the truth! We have had more 5% pullbacks than normal and enough negative headlines to scare Stephen King.

Regardless of the overwhelmingly negative headlines, the market continues to look forward and go higher. Markets tend to top out soon after a) the indices continue to climb higher while b) the advance/decline line goes lower. When that happens, for even one month, look out!

Yesterday the A/D line hit a 52 week high! This shows tremendous breadth to the most recent bounce. While the market always finds enough to worry about, think about two headlines this month. 1) An EU official on the TV screen screaming about a potential nuclear meltdown in Japan, and then the 2) Outlook for US Debt being downgraded by S&P, which a 1-in-3 chance of a downgrade within the next two years. (a downgrade of US debt was once thought unthinkable). Amid all of this, the A/D line is at a new high!

Don’t chase and don’t get complacent! But make hay while the sun is shining! Be selective, take your signals when they come.

By: Jordan Kimmel

Disclosure: No relevant positions

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