For Every Top, There's a Bottom
Revisiting an old friend... Two simple indicators to seek the bottom... The power of market breadth... For every top, there's a bottom... Add this exercise to your routine... Video: Rick Rule on the Fed...
You'll hear all day long what the major indexes are doing...
Today, for example, they took another beating – with the tech-heavy Nasdaq off 4%, the benchmark S&P 500 down 3.25%, and the Dow Jones Industrial Average off 2.4% as the bear market continues.
But you can learn a whole lot more by looking beyond the headline numbers that you see on the news. To the same point, folks often use the S&P 500 as a stand-in for what "stocks" are doing. And that certainly can be a useful data point.
But today, let's look at what's actually going on with stocks as a whole...
By that, I mean an indicator Wall Street calls "market breadth." That's the fancy way of asking: "What are most stocks doing these days?" There are just three choices: going up, going down, or staying the same.
The answer seems obvious. I (Corey McLaughlin) can already anticipate feedback that could fill my inbox... "Of course stocks are going down. That's what you've been saying all year. Stop being such a downer."
Anyone who says this would be right, and thanks for reading. We hope we've been helpful with our warnings, even if it's sometimes hard to stomach what we're saying.
But, as I'll show today, we can learn a lot by looking at two simple yet powerful market-breadth indicators. This includes the answer to a related and – depending on your view – more uplifting question that seems to be on everyone's minds today...
'When will stocks stop going down?'
This would be pretty valuable information to know. And while we can't answer with certainty, the good news is we can get close enough, by exploring different versions of the same question... by looking at the facts of how stock prices are behaving right now.
First off, if you've prepared correctly and heeded our warnings, you're already way ahead of most people...
We've advised holding a generous amount of cash, "hard assets" like gold and real estate, and a core portfolio of high-quality, low-volatility stocks. Ideally, you'd even have some commodities exposure and bearish options bets thrown in.
Secondly – and this is going to sound too simple – as I've written before, a wise man once told me that it's impossible for the stock market to go up if there are more individual stocks going down than up.
And vice versa... The market won't go down if more stocks are going up than down.
Like I said, it's a simple thought. Apologies to longtime subscribers who I might be offending. But I've seen so much nonsense in the mainstream financial media lately, I feel compelled to share this idea with every Digest reader.
Plus, thinking simply is often best – especially when it feels like the world is cratering around you... we're living through an era of inflation the world hasn't seen in several decades... bank CEOs are spouting opinions on recession odds... and it seems everyone has a thought on when the bottom might arrive for stocks.
To borrow a piece of advice from our colleague Dan Ferris, rather than trying to predict, look at what's happening in the present and prepare accordingly. As I'll explain momentarily, you just might find the correct answers that way, anyway.
Here's what I mean...
What if I promised you could get a read on the long-term trend (up, down, or sideways) of all of the stocks that trade on the New York Stock Exchange ("NYSE"), with essentially one number or chart?
Yes, promised you. I don't do that lightly. After all, I'm speaking with certainty about the direction of the entire U.S. stock market – thousands of stocks of all kinds of businesses, large and small, in every sector you could think of.
Well, here's the simple way to figure out which way they're trending... and whether we're near a bottom: You look at market breadth.
You can measure market breadth a few ways...
I last mentioned one a few weeks ago via our colleague and DailyWealth Trader editor Chris Igou, who noted a significant trend change earlier this year – to the downside – in the "advance-decline line."
The advance-decline line is a basic technical indicator that measures the number of stocks going up versus down on any given day. (See, I'm not the only one who thinks this simple idea is useful.) And this is a cumulative indicator.
So if 100 more stocks rose today than fell, you would add 100 points to the advance-decline line's rolling total. Looking at this total day after day reveals a trend about the strength or weakness of the market.
In bull markets, the advance-decline line consistently rises. In bear markets, it goes lower...
The traditional definition of a bear market is that an index or sector is down 20%. If you're really interested in protecting capital, though, you'd likely be better off not waiting for that... and looking at an indicator like the advance-decline line instead.
And then think about it in the context of the current market environment, like record-high inflation and slowing economic growth...
That's what Chris did (and, as we've said many times, what someone like our resident technical-trading expert Greg Diamond also does every day). As we quoted Chris in the May 2 Digest, he noted a change in trend in this indicator beginning around New Year's Day...
The broad rally in U.S. stocks has lost steam and the advance-decline line is trending downward for the first time in years. Take a look...
Chris was spot-on to alert DailyWealth Trader subscribers to this inflection point...
In the two months since, the advance-decline line has continued trending downward... and, no surprise, the benchmark S&P 500 is down 16%, the tech-heavy Nasdaq is down 19%, and the Dow Jones Industrial Average is off 14% since he shared this warning on April 21 in DailyWealth Trader.
So, there's our first guiding light... More stocks have been going down than up. The trend is down for U.S. stocks. OK, if you've been following along with us this year, you probably kind of knew that already.
As for spotting the bottom...
To explore this, we'll look at another trusty market-breadth indicator...
It's the value of the NYSE Composite – the roughly 2,800 stocks that trade on the New York Stock Exchange, from blue chips to small caps – compared with the percentage of those same stocks that are trading above their 200-day moving averages (200-DMAs).
The NYSE Composite Index gives an even broader picture than the S&P 500, the Nasdaq 100, or the Dow Jones Industrial Average... to see what most stocks are telling us today.
And we're using the 200-DMA because, as longtime readers know, it's a good technical indicator of a long-term price trend of any asset – from stocks to bonds, bitcoin, or beans... The 200-DMA is what it sounds like: a rolling average of a stock or index's price over prior 200 trading days, which covers about nine months on your calendar.
Here's a five-year chart of NYSE Composite versus the percentage of NYSE stocks trading above their 200-DMA...
A few things stand out, of course. As of today, the number of stocks trading above their 200-DMAs is around 17%. That's close to the percentage during recent market bottoms.
During the COVID-19 panic and the 2008 financial crisis, fewer than 10% of stocks were above their long-term trends. In more garden-variety corrections in between those crashes, the number has settled between 10% and 20%.
We can't know for sure how low the percentage will go this time, but one thing is for sure...
The bottom is in sight – but we can't say we're there yet...
Again, though, the good news: We don't ever have to pinpoint the exact bottom. If you're sitting on a nice stack of cash ready to deploy, the more important thing to watch now is for this trend to turn around.
Then we can say it's a time to get bullish again... and start scooping up shares of high-quality stocks en masse – at cheaper prices than we've seen in at least a few years.
Because history also shows after times like these, returns are much better the further out in the future you go.
As our colleague Brett Eversole shared in True Wealth Systems just yesterday, in the year following steep three-day market declines – like the S&P 500's recent 8.9% drop in three days – stocks were up a year later 86% of the time. As Brett wrote...
The table below shows the type of gains that could be on the way...
Since 1950, stocks have typically returned 7.8% per year. But you can do better than that when you buy after busts like the one we just saw.
While painful, those busts lay the groundwork for future gains. And massive three-day declines have a history of doing exactly that...
Similar extremes led to 7.2% gains in three months, 9% gains in six months, and an impressive 22.8% over the next year. That's nearly triple the typical buy-and-hold strategy.
These are fantastic returns. And they show we could be nearing a bottom for the market. That doesn't mean you should jump into stocks right now, though...
The trend is still down. After all, stocks hit a new low this week.
Brett told his subscribers to wait for an uptrend – and for the True Wealth Systems computers to flash "buy" – before getting back into the market. These computers warned to get out of U.S. stocks earlier this year, too.
For every top, there's a bottom...
Getting back to our "market breadth" indicators...
I first wrote about comparing the behavior of the NYSE Composite versus the long-term trends of individual stocks back in the July 6, 2021 Digest, noting an "early warning signal for U.S. stocks." As we wrote then...
In short, the major U.S. indexes may be creeping to new highs every few days. But if you look closer, you'll see that the market is telling us something different than "all is well"...
All is not well. The number of individual stocks hitting new highs each day has been decreasing as of late... Plus, an increasing number of stocks are starting to trade below their long-term averages (though that is only down slightly from a record high).
When this combination happens, it's usually an early indicator that a broader sell-off in stocks could be ahead... or at the very least, that we're closer to a top than a bottom.
At the time, the number of stocks above their 200-DMAs dipped into the 80% range, after hitting new highs of roughly 90% for weeks in February, March, and April 2021...
Frankly, even I felt it was a bit early to make a warning to watch this trend. And I was unsure anyone would be listening, given that the major U.S. indexes were hitting new highs. But, counterintuitively, that's exactly when you want to be thinking about market tops.
If you owned an S&P 500 index fund and sold it that day – July 6, 2021 – you would have avoided a 15% loss heading into today... while only missing 10% more upside into the U.S. benchmark's peak on January 3 of this year.
We could play the 'if' game forever, though...
The point is, by looking at market-breadth indicators, we were starting to see some stocks sell off and dip below their 200-DMAs, even while the indexes were hitting new highs. This was a signal that trends were changing. As I wrote then...
You can see a trend "flip" in this chart...
The black line shows the value of the NYSE Composite. And the blue line shows the percentage of NYSE stocks above their 200-DMAs at any point over the past two years...
Coming out of the last major market bottom in March 2020, the major indexes predictably rose as individual stocks started to trade higher and more folks became less scared and piled back into the market...
Around April of this year, the NYSE Composite kept climbing to fresh highs, despite the number of stocks in long-term uptrends starting to drop to the levels from the end of 2020... albeit from the absurdly high peak of about 90%.
Relatively speaking, that means for roughly the past two months, fewer stocks have been heading higher while the headline indexes have still been hitting new highs...
This is not what you would expect to see in the strongest, healthiest bull markets.
I don't need to tell you – you can see in the update to this chart earlier – that both of those lines have fallen sharply off since. Even as the indexes were peaking around New Year's Day, the number of stocks moving into long-term downtrends was rising.
When the broader market peaked this January, about 60% of stocks were already in long-term downtrends.
Now, we're looking at these same indicators to seek a bottom...
Again, we're not trying to be a hero and precisely nail the bottom. With stocks continuing to sell off, we just want to know if we're near it...
And based on these two simple yet powerful technical indicators we've shared today... we are.
Pair the comparison of the NYSE Composite with the percentage of stocks above their 200-DMAs. Then note that the advance-decline line is still declining. The result is real, solid evidence – not opinion, but facts – about which way the market is trending.
As we also quoted from Chris in the May 2 Digest...
In a healthy bull market, the market advances broadly. A large number of stocks in various sectors all rise together. This is shown by steady upward moves in the advance-decline line.
But when the market is weak, it may be propped up by only a few strong performers. In this case, the advance-decline line will taper off or even drop.
When the advance-decline line falls, it's a major sign to proceed with caution. It means that a bull market cycle may be nearing its end...
That's exactly what we're seeing today...
Two months later, this is still the case.
And it's also true that more stocks have broken below their long-term trends than just a few months ago. That might sound bad, but it also means there are fewer stocks left to do the same.
This isn't to say stocks can't fall further – or stay below their long-term trend lines for an extended period of time. But those trend lines will eventually fall lower and lower. And ever so slowly, folks will see stock prices as more reasonable again...
But the market as a whole may have not hit bottom yet.
For instance, our Stansberry NewsWire editor C. Scott Garliss told me earlier this week the S&P 500 could approach 3,400 before all is said and done, based on the earnings, inflation, and growth outlooks we're seeing today.
And today, Dr. David "Doc" Eifrig also shared data with his Income Intelligence subscribers that, based on his analysis, point to significant downside that remains in the markets. If you're a subscriber or Alliance member, be sure to check out that issue.
Put all this information together... and we'll want to see a sustained reversal in both of these indicators we've mentioned today, among other things, before saying the trend for stocks has turned around.
All in all, you can see why looking at market breadth can be a powerful yet easy exercise. You could do it daily, or weekly, or even monthly simply to provide some good context to your investment decisions.
This exercise is based on facts – not opinions, emotions, speeches, or anything else. In an upside-down world with no shortage of noise, that's refreshing.
Rick Rule: The Fed Will 'Chicken Out'
"The response to inflation will be severe and dramatic like it was in the 1970s," once investors realize how much their purchasing power has been diminished, warns Rick Rule, the founder and CEO of Rule Investment Media...
As he told our editor-at-large Daniela Cambone at the Swiss Mining Institute's annual conference, the Federal Reserve is on the right track with its plan to quell inflation with raising interest rates. However, he believes, the Fed will most likely "chicken out."
"If we had a period of real interest rates, it would certainly cure inflation," Rule says, "but it wouldn't cure inflation until it did amazing damage to various balance sheets." Don't miss this interview...
New 52-week highs (as of 6/15/22): None.
In today's mailbag, feedback on yesterday's Digest and a heartwarming note for Ten Stock Trader editor Greg Diamond... Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.
"Corey... J. Powell basically said today they are attacking credit/liquidity. That practically guarantees a bond crisis... But hey! This is an opportunity of a lifetime. THANK YOU." – Paid-up subscriber Bill B.
"The Fed's statement that there is too much outside influence out of their control that makes it no longer able to engineer a 'soft landing', [makes me] say, 'well, so much for globalization.'
"The sooner this can be rectified, the better off the U.S. will be in terms of designing their path back to economic supremacy and stability." – Paid-up subscriber Larry H.
[You wrote yesterday]:
There's a lot of lines on the below chart, but the thick blue one is the important one. So far in 2022, the global bond market is down 15.6%, an outlier among the rest. The second-worst performance during the span Bianco shared was a 5.17% loss in 1999...
"I thought it was interesting that the spread above (10.11 is the same as our PPI 10.8 currently). If there is a correlation, it would be energy costs and money policy." – Paid-up subscriber David M.
"To Greg Diamond and his team!! This note is just sent to counter some of the negative feedback that members of the Ten Stock Trader service seem to be sending you. Let me give you a bit of my personal background. I am a 95-year-old current member in good mental and physical health. God has really blessed me with a wife (92, three children, six grandchildren, and nine great-grandchildren. I have a PhD in mathematics and a good bit of your analysis is comprehended.
"I have been investing in the markets for 70 years (mutual funds, stocks, bonds, commodities, etc.) with a host of different analysts. However, none of these has come close to doing the research that you provide. My wife is now (5 years) suffering with dementia problems and as her full-time care-giver, I am fully aware of the patience needed. I am extremely well pleased with your willingness to exercise patience in making your purchase decisions. Indeed a job WELL DONE." – Paid-up subscriber Doyle A.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 16, 2022