Business & Investment

Opinion: Stocks are strong so far, but this sign of market top may appear without warning

A healthy stock market has ignited on every cylinder, and Wall Street is certainly doing it lately. For example, on January 20, almost all of the major equity market averages hit record highs.In addition to the Dow Jones Industrial Average
DJIA,
+ 0.17%

And S & P 500
SPX,
+ 0.12%
,
Other indices that hit record highs that day included the Dow Jones Transportation Average.
DJT,
-1.17%
,
Nasdaq Composite Index
COMP,
+ 0.11%
,
S & P400 Medium Cap
MID,
-1.20%
,
And Russell 2000
RUT,
-0.16%
..

Compare these recent new highs with the 2007 US market highs before the global financial crisis. Both the Dow and S & P 500 peaked on October 9th of the year, while the Russell 2000 peaked on July 13th of the year and the Dow Jones Industrial Average peaked on July 19th. Was recorded.

This represents an important feature of the top of a typical bull market. It doesn’t happen in a day. Tops tend to spawn gradually as one segment of the market rolls over and then another segment rolls over. There are exceptions. Especially when an external “black swan” event pulls the rug out of the market, such as the February 2020 bull market highs caused by the pandemic expansion.

Focus on divergence

Given the widespread participation of healthy market signs, it is no coincidence that most equity market timing theories seek to identify the top of the market by measuring divergence. A good example is Dow theory, the oldest market timing system in widespread use today. It concludes the actions of the Dow Jones Industrial Average and Dow Transport, using the differences between the two as a sign of a potential turning point in the market. Dow theory is currently sending a bull market buy signal.

One of the market timers that pays particular attention to internal market differences is Hayes Martin, president of Market Extremes, an investment consulting firm that focuses on key market turning points.I Dedicated a column to Martin’s analysis In May 2020, we participated widely in the bull market as it is now. At that time, I reported that the stock market is stronger than even the most bullish investors believe. Since then, the S & P 500 has risen by more than 20%. (Martin doesn’t have an investment newsletter. My newsletter tracking company hasn’t audited his investment performance.)

In addition to focusing on key market averages, Martin is also looking for different market styles, factors and differences that occur between industries.

The difference that his study found to be the most accurate early warning of the major market leaders occurs when small-cap and microcap stocks are weak and large-cap stocks are strong. No such difference currently exists.

Investors should still not be complacent, as divergence can occur quickly. Currently, Martin is worried about the bubbling of the stock market, saying that “a serious interim revision is almost inevitable in the coming months.” But for now, he doesn’t think he’s seen a “final high”, mostly because the market seems to be firing on all cylinders. His best guess is that this top will occur “at some point in the first quarter of 2021 or perhaps a little later (as in April)”.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a flat rate to be audited.He can reach at mark@hulbertratings.com

More: Strains priced for vaccination and perfection expose investors

Read again: When the bull market collapses, it “is likely to collapse violently,” warning long-standing bears that investors are overly confident in vaccines.

Opinion: Stocks are strong so far, but this sign of market top may appear without warning

http://www.marketwatch.com/news/story.asp?guid=%7B21005575-02D4-D4B5-4572-D22361E177F7%7D&siteid=rss&rss=1 Opinion: Stocks are strong so far, but this sign of market top may appear without warning

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