From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Several weeks back, we discussed the fact that new lows were non-existent across just about all of the major averages in the US.
It’s pretty hard for a market of stocks to decline in any meaningful way without an expansion in downside participation. And we just aren't seeing any signs of this when looking through our breadth chartbooks and new low indicators - not even on shorter timeframes. This remains the case today.
So you would think this would be an excellent opportunity for the bears to take control… But, they just can't seem to get it done! Let's dive into some of our breadth and sentiment indicators and see what they're currently saying about this.
It's clear that there has been a notable deterioration in participation beneath the surface in the US stock market in recent months even as the large-cap indexes continue to make new highs.
Here's what we mean:
The market is skating on thin ice these days as less than 5% of stocks traded on both the NYSE and Nasdaq are making new 52-week highs. The large-cap averages are going to need more support than that if they're going to sustain these latest highs. But, it also doesn't mean we have to experience any meaningful corrective activity. Sideways is always an option...
But, where are all the bears?
In the bottom panel, we have the average of II bears and AAII bears. Notice how it's been moving in a straight line lower for almost a year now? This means there are fewer and fewer bears on the street.
So does this lack of bears present a risk to the markets moving forward? Well, without them we have no incremental buyers... So, the short answer is "YES."
But digging a little deeper, and what this really means is there is now plenty of room for pessimism to emerge and the current level of risk to elevate along with it.
We have new highs at the index level and a strong sense of optimism among investors. At the same time, these characteristics must contend with weak breadth, a lack of confirmation from internals, and an absence of pessimism. This raises the possibility of a sentiment unwind which we may very well see if prices begin to falter... And this shouldn't come as any surprise considering all the overhead supply we're seeing within equity markets.
As always, we'll be keeping a close eye on internals and sentiment moving forward to gauge the market's overall health, and we will be right here talking about it as soon as anything changes.
