Although gains in the S&P500 are becoming more selective in terms of individual stocks, this is not sufficient to indicate we are in the final stages of the bull market, says Paul Desmond of Lowry Research. According to Desmond:
“A more advanced warning sign of an approaching major market top will eventually occur when our various Adv-Dec Lines reflect a more intense level of stocks dropping out of the bull market. Last week we noted that when the DJIA and the S&P 500 Index rose to new bull market highs on Dec. 18, 2013, several of our Adv-Dec Lines failed, by very nominal amounts, to also make new highs. In fact, those divergences were resolved when all of our Adv-Dec Lines rose to new bull market highs at year-end. Even the NYSE “all-issues” Adv-Dec Line, which had been weakening since late-October, due to its many closed-end bond fund components, rose to new highs on the last day of 2013. Thus, there are currently no signs of the kind of advanced market selectivity typically found in the final months of an old bull market.
“An important point is that investors should not be concerned about a few days or even a few weeks of relatively nominal Adv-Dec Line divergences. The kind of Adv-Dec divergences that carry highly negative implications typically persist for at least four months or longer, and follow a pattern of successively lower lows while the DJIA and the S&P 500 Index make progressively higher highs. At that point, as the market continues to narrow, investors should regularly cull laggard stocks, and reduce portfolio diversification while gradually building an increasingly heavy defensive posture – much like a farmer harvesting his crops in advance of Winter.”