People who have been in the markets for a long time see the signs of excess all around. And, yes, Friday's action in GameStop (GME) is just one aspect of it. But there are others.
The fact that the ARK exchange-traded funds -- (ARKK) -- are regularly taking in more money than some Vanguard or Blackrock funds -- (VOO) -- tells you about the higher level of speculation. That initial public offerings are more than doubling on their first day of trading is another. And don't get me started on the whole business of special purpose acquisition companies.
But prior markets have had plenty of excess, as well. We all know that Nasdaq was up over 80% in 1999. We also know the excess started about a year before that. And it didn't top out until March of 2000. We all know that the housing market when everyone you knew was busy flipping houses was excess in 2004-2005, but the housing market itself didn't slow until 2006 and the stock market didn't much care until 2007.
If we step back and look at the chart of the S&P on a weekly basis for the past few years we can see that prior to those two 20%-plus corrections the weekly chart gave no warning. There were no lower highs on the chart; it just fell off a cliff. And broke the line like it meant it.
Yet, there were some similarities at those highs. The McClellan Summation Index had stopped going up or had made a lower high in both cases. The number of stocks making new highs was contracting. The number of stocks making new lows was expanding and sentiment was far too bullish.
Breadth, using the advance/decline line though, was not at a lower high in October 2018. Nor was the Russell 2000. At 2020's February high breadth was at a high.
Yet, the Summation Index was nowhere near the high for the February rally; it was at a lower high and couldn't lift itself off the mat. Yes that is similar to today.
The number of stocks making new highs was cruising along in early February and then fell off a cliff. By the time the S&P had rallied another percent, they were half what they were almost two weeks earlier. In this market, the number of stocks making new highs peaked nearly three weeks ago at 375, and currently stands at 163. If we use common stocks only -- getting rid of all that non-stock stuff like the triple-counted special purpose acquisition companies -- we find there were 350 new highs a few weeks ago and 70 now.
Stocks making new lows though were around 40 in early February. By the time the S&P made its high that number was up to 75. Friday there were two stocks making new lows.
This is not a market to be complacent in, even if there is a total lack of selling right now. And there is a lack of selling. Just witness how as soon as we came down on Friday the selling dried up. Right now the problem is that the buying seems to have faded away these last few weeks.