The Bull Market Isn't Losing Steam

Ninety-five percent of information doesn't matter. Our job is to figure out the 5% that's worth watching.

That was the overarching message my mentor, Steve Sjuggerud, drilled into my head over and over again as I cut my teeth in the markets.

We live in a world of minutiae. Information is plentiful. You can slice and dice and dissect the numbers and headlines as much as you want. But it won't make you a better investor if you can't tell what's important.

Instead, the key is figuring out the handful of things that actually matter... and ignoring the rest.

Today, we're looking at one data point that does matter. It was flashing a warning sign a few months ago. But its recent breakout tells us new highs are on the way for stocks.

Stocks Rise Together in a Healthy Market

Investors are always trying to spot problems in a bull market before they arise. One of the best ways to do that is by looking at the advance/decline line...

The advance/decline line takes a daily total of the number of rising stocks minus the number of falling stocks. Each day's number adds to the previous day. This creates a cumulative series that rises if more stocks are rising than falling.

The key part to watch is how this measure performs versus the market. Specifically, if the market is hitting new highs and the advance/decline line isn't, that's a warning sign... We don't want to see only a few stocks leading the market higher.

That was the case a few months ago. But now, the situation has reversed. The advance/decline line recently broke out, while the S&P 500 Index remained below its all-time high. Take a look...

This is a good sign for market health. It's not just a few highfliers leading the rally. Most stocks are rising together... which means the market is healthy.

It gets even better, though. This new breakout means the market should move even higher in the coming months.

To see it, I looked at each instance when the advance/decline line reached a one-year high while the S&P 500 was 3% or more below its one-year high. That has happened 12 other times since the data begins in 2002. Here's what happened next...

Stocks have been sitting below all-time highs. But this setup tells us new highs are near certain in the coming months.

Similar instances led to gains of 5.2% in three months, 7.9% in six months, and 14.4% over a year. That's healthy outperformance. Plus, stocks were higher a year later 100% of the time.

Lots of folks are still looking for reasons to worry. But they're focusing on the 95% of what's out there... the stuff that doesn't matter.

The advance/decline line is part of the 5% that's worth watching. Today, it's giving the "all clear." And history shows that the overall market will soon follow. That means we can ignore the noise, remain bullish, and stay long.

Good investing,

Brett Eversole