Stocks have recently witnessed an unprecedented cluster of new highs occurring on negative volume.
A number of stock bears have pointed to the supposed thin nature of the rally in justifying their skepticism. That is, the rally has been led by a relatively small number of stocks as opposed to broad participation. While we have seen anecdotes of such a condition, we can’t say that we fully subscribe to this concern. Factors such as the NYSE advance-decline line hitting new highs along with the various market cap indices, from small-caps to large-caps, also at new highs undermine the argument, in our view.
We will say that some of our proprietary breadth measures have not supported the recent rally. When such divergences have occurred in the past, stocks have eventually dropped, confirming the signals of our indicators. However, the timing of such a reckoning can be difficult. Outside of that condition, as we said, concerns about breadth have been mainly of an anecdotal nature.
Today’s Chart Of The Day is also best classified in the anecdotal category, though perhaps a little more alarming than some of the recent “warnings” that we’ve seen. It deals with a recent odd spate of new 52-week highs in the S&P 500 on days in which declining volume on the NYSE actually exceeded that of advancing volume. There have actually been 6 such new highs in the past 3 months.
If that doesn’t seem like a big deal, it is actually a record number of such days within a 3-month time period. In fact, it is double the previous record number of 3.
So, how much of a warning sign – if at all – is this recent phenomenon? Going back to 1965, there have been plenty of these occurrences, e.g., the latter 1990?s and 2013 that failed to lead to any negative consequences whatsoever. However, most of those were isolated events. The recent cluster of these days is, again, unprecedented and may signal a bigger warning sign for the stock rally.