Since this is the 10-year anniversary of Lehman Brothers' collapse there have been all sorts of "look backs" and with that questions about the state of the current bull market. I am not a fan of top calling, or bottom calling for that matter. I tend to spend more time just trying to work out the swings in the market. However one of the points I have made here over the last few years is that breadth tends to peak well before the indexes do.
In the late 90s breadth peaked in 1998. It was about 15 months before the indexes peaked. In 2007 breadth peaked in the spring and the S&P did not peak until October. At the 2000 high the divergence between the breadth and the indexes was glaring. At the 2007 high it was not nearly so.
Here is the chart of the Cumulative advance/decline line in 2007. You can see the divergence at the July high was miniscule and breadth never recovered after that as it lagged into the October high.
There has been much chatter lately about the Transports making a new high and how it portends such great things going forward. Let me stop you right there. The Transports making a new high are good, but it says nothing about going forward. Just take a look at the Transports in 2007. They made a high in July just like all the other major indexes. The issue was when they couldn't even lift off the ground (pun intended) into the October high.
So the new high in July was good, it was a confirmation of sorts, but it told us nothing about what would happen going forward. The non-confirmation in October told us a lot more.
I have discussed the number of stocks making new highs quite a bit of late so let's look at the 10-day moving average back in 2007. The moving average peaked in December 2006. There was a series of lower highs into the July high (a negative divergence). And again in October, there was another lower high.
Finally, the McClellan Summation Index had made a series of lower highs since December as well, so it too was showing a negative divergence.
As of now the S&P has not yet made a new high, it is about 10 points away. But unless breadth gets cranking quickly there is a real possibility that we could see a new high in the S&P and a lower high in the cumulative advance/decline line, albeit a minor divergence.
The Summation Index hasn't even been able to lift in this current move up in the indexes. It would still require a net differential of +900 advancers minus decliners to turn it from down to up. Breadth has been green for five days already and still this hasn't been able to turn up. The best breadth day was last Monday with +650 so unless breadth gets surging fast it is unlikely this will turn up before we head back to an overbought reading.
The 10-day moving average of stocks making new highs is well off the January high and even off the June high. We saw a slight improvement in new highs this past week but overall, there are still negative divergences in place.
So when I get asked about the Transports making new highs, I will gladly tell you that it is a positive but it doesn't tell us much about what comes after.
