Every bull market climbs a Wall of Worry...
Folks are always looking for a reason to stress. Even when times are good, they try to get ahead of the next calamity.
The bearish argument always sounds intelligent. For instance, assuming the war with Iran will lead to economic disaster sounds prudent and wise. But that's not what has happened.
That's because events rarely go as badly as the bears expect. When the worst doesn't materialize, prices rise... And so, the market climbs the Wall of Worry.
Still, there can be good reasons to worry – even in a powerful bull market.
One real concern is beginning to show up right now. And while it isn't a reason to sell today, it is a signal to watch in the coming months.
Don't Predict the Future... Watch the Market's Health
Hunting for the next market "boogeyman" usually means trying to predict the future.
Folks try to peek around the corner to see the next black swan coming. But the problem with black swans is that, by definition, they're unpredictable. You can't see them until it's too late.
Fortunately, we don't need to try to predict the next crisis. Instead, we can watch the health of the market itself. Over history, that has been a better way to spot risks to a bull market before problems arise.
One way to do this is to look at the advance/decline line for the S&P 500...
This signal takes the number of stocks that rose minus the number of stocks that fell each day. The next day, you calculate that number again and add it to yesterday's number. Over time, that builds a cumulative series that goes up when more stocks are rising... and goes down when more stocks are falling.
This gives us a look at the overall market's health. In a strong bull market, the advance/decline line should hit new highs when the overall market does. That shows good market breadth... which means many stocks are rising together.
On the other hand, if the relationship breaks down, that means only a handful of stocks are driving the rally. Unfortunately, that's what has happened in recent weeks. Take a look...
The overall market ripped to new highs after the March bottom. The advance/decline line kept up for a bit... It broke out to a new high in mid-April, showing that most stocks were participating in the rally.
Over the past month, though, the advance/decline line hasn't kept up. It has been falling, which means more S&P 500 stocks are moving lower than moving higher.
Importantly, that doesn't mean the bull market is over. This kind of divergence can last for months... even years.
During the dot-com boom, the advance/decline line topped out more than two years before the market. Not only that, but if the laggards start moving higher again, the problem could resolve on its own.
So this isn't a sell signal. It's a warning sign.
If the advance/decline line keeps falling and the market rolls over, it could mean a true bear market is on the way... But we're not there yet. We'll keep an eye on this signal in the weeks ahead.
Good investing,
Brett Eversole
Editor's note: This AI-driven boom is still going strong for now. But when the crash finally comes, it will blindside nearly half of the U.S. population. That's why, today, Brett and MarketWise CEO Dr. David "Doc" Eifrig are sharing how to position yourself to profit before the end... and revealing the "red line" that can help you predict when to get out.
Further Reading
"Investors drive themselves crazy worrying about timing," Brett writes. It might seem like buying at the right time is of utmost importance. But over the long term, one thing matters a whole lot more.
"Good investors understand that progress isn't always measured in this month's cash flow," Porter Stansberry says. One legendary investor boiled down his years of experience into four laws. They might sound simple, but they're crucial to understanding how to invest like the rich.