The stock market had a stellar year in 2013, beating the expectations of most analysts and investors. On the heels of such gains, 2014 has turned out to be a little different with most of the major averages trading flat, down, or only slightly positive as investors try to figure out where to go from here.
Since the market is the collective result of a billion different people all forming an opinion on whether to buy or sell, and then taking action one way or another, it makes sense to listen to more than just one person on what the market is doing.
To achieve this result, we interview a wide range of experts, analysts, and market technicians every day (aside from Sunday) on Financial Sense Newshour to help investors discern major market and economic trends. Sometimes they agree, sometimes they don’t.
A good example of how market technicians will sometimes differ—and give very different outlooks—was perfectly displayed between last week’s interview with Bert Dohmen vs. this week’s interview with Tom McClellan.
Last week, Bert Dohmen explained why he felt the market was in the process of forming a top, with his expectation for economic data to begin surprising on the downside, and even going so far to compare our current situation to 2008, just before the market crashed 30% (see story).
As usual, one person’s view of the market should always be taken with a grain of salt.
This week, Tom McClellan says that, as the market has consolidated since the beginning of the year, we are actually seeing a bullish condition as the number of stocks advancing to new highs (see the New York Stock Exchange advance-decline line below) continues to steadily increase. Since this indicator usually peaks well before a major top, like it did in 1998 or in 2007, it is a very helpful tool for determining the strength of the overall market trend.
Here, Mr. McClellan explains:
“The New York Stock Exchange advance-decline line has now made another all-time high…and that is nearly always a bullish condition for the market. It offers a lot of immunity to the worst sort of declines, which typically arrive after a divergent top with the advance-decline line topping out ahead of prices, like we saw in 2007.”
“[We] can still have an ordinary garden-variety type correction come along—a minor dip like we just had in February—but when you have the advance-decline line acting strong it says that liquidity is plentiful, such that even the least deserving stocks can still get their share of it and that tells you that things are generally good.”
“You can have a condition like we saw in 1999 and 2000, at the top of the internet bubble, where the Dow and the S&P and the NASDAQ were all zooming ahead to higher highs, but the work of that index push was being done by just a handful of stocks. Looking elsewhere, the advance-decline line itself had peaked all the way back in early 1998 and was heading downward as the internet bubble was arriving saying that liquidity was a huge problem… So, that was a huge warning of trouble that finally did start to arrive in mid-2000. We're not seeing that warning now.”
When does Mr. McClellan think the market may run into some trouble? Probably by the end of this year, once the Fed has completely wound down its third phase of quantitative easing from the market. However, not wanting to repeat the past—the market saw large declines within a month after QE1 and QE2 both ended—the Fed learned its lesson and decided to exit slowly by tapering its bond-buying program a little each month. Whether that allows investors and the economy time to adjust and push stocks higher 2015 and beyond, remains to be seen.
For now, Mr. McClellan says, “my long-term leading indicators are saying that the rest of 2014 should be actually a strong period. We also have the tailwind of the Fed pushing on us at billion a month and we have the confirmation from the advance-decline line looking strong.”
What do we at Financial Sense think? With energy prices in check, high corporate profits, low interest rates, strong market breadth, lack of strain in the credit markets, and most leading economic indicators still in positive territory, many of the warning signs associated with major market tops or large declines simply aren't present.
Will these things start to change direction this year or next? Since tops are a process and not an event, rather than making a prediction, stay tuned as we monitor these and other important market metrics moving forward.
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