INCLINE VILLAGE, Nev. - Last week the Dow lost 150 points in two days. The commentary on financial shows changed from "I'm buying the next pullback" to "I'm turning bearish." This mood shift is common on Wall Street. So, was it a market top? Are we entering a new bear market?The single best indicator for predicting major market tops is the Advance Decline Line. Lowry Research Corporation (www.lowryresearch.com) published a thorough report that found the most common characteristic of tops was poor market breadth, as seen from a falling Advance Decline Line.This market-breadth indicator compares the advancing stocks on the NYSE to the declining stocks. It can be found in most financial publications, such as Barron's and Investor's Business Daily.When the Advance Decline Line is stronger than the S&P 500 index, there is broad market participation. In effect, the troops are leading the generals. When the S&P 500 is stronger, however, market breadth is poor, which serves as a warning flag that the risk is increasing. Unfortunately, the indicator found in financial publications does not always represent what is actually happening to the underlying market. That is because nearly half of the NYSE issues are preferred issues, closed-end funds, stock funds, ADRs, and warrants.Therefore, while the advancing and declining figures are technically correct, they are misleading because about half of the issues represent "irregular" securities. To correct that, I calculate an Advance Decline Line from the price activity of the 1,500 common stocks that comprise the S&P 1500 index.So what is this indicator saying now? It's good news. Our stocks-only Advance Decline Line reached a new 52-week high last Tuesday, confirming the S&P 500's level. Far from showing a negative divergence, this indicator predicts higher prices ahead. This work confirms my thoughts last week when I introduced the acronym TINA - There Is No Alternative. Those in need of income are moving to dividend-paying stocks, which is why funds like Schwab U.S. Dividend Equity (SCHD) rose last week. Large-cap dividend paying stocks are in the sweet spot. Bottom line: the market is not topping out.- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
February 26, 2013 | Back to: News