Will the troops catch up with the generals? Watching for confirmation

From the depths of the sell off on December 24, the markets have made a remarkable U-turn to recover most if not all of last fall’s decline.  In particular, the S&P 500 and the NASDAQ recently hit new all-time highs.  So, party on, right?  Maybe … but not so fast.

In most healthy markets, multiple indexes all set new highs at roughly the same time.  When they do reach nearly simultaneous highs, it indicates that market strength is shared broadly.  In essence, everybody is enjoying the party together.  Market “technicians” (those who read price charts to try to discern future market moves) call this a confirmation of the high which is a good thing.

As I write this, the situation is different. Many of the other major and minor stock indices have not recovered to new highs indicating, at least for now, that the new high has “not been confirmed” (by multiple indices).  When there is lack of confirmation, it generally means that fewer and fewer stocks (the generals) are leading the market higher. It's like the stock market doesn't have the solid broad base (lack of foot soldiers) and so can be toppled if a few stocks don't do as well.

We will keep an eye on several other market barometers to see if we can get continued strength with more participation.  In particular, the Dow Jones Industrials and Transports as well as the Russell 2000 index (of small companies) have not yet achieved new all-time highs.  And, of course as we’ve mentioned many times, most international exchanges remain way below their all time highs, some of which were set nearly 20 years ago at the peak of the Dot-Com era.

These could simply be short-term non-confirmations which will be soon confirmed as many of the lagging indices catch up. In that case, we would assume that this long bull market remains intact and healthy. On the other hand, if there are no more confirmations, then when the market turns direction and heads lower we would be more concerned about the likelihood that perhaps we are in the process of forming a major top signaling the end of this bull market. Time will tell and we will keep watch.