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Thursday, May 26, 2022
Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.
It’s no secret that stocks and the 401(k)s that hold them have been battered and bruised this year, as every fledgling rally eventually whipsaws investors further into the red.
Last week, the S&P 500 (^GSPC) nearly closed 20% down from its record high — threatening to plaster ‘bear market’ headlines across the evening news. But the S&P avoiding this label is little comfort to many investors, as the Nasdaq has been in bear market territory since crossing this chasm on March 7.
In this market environment, it seems everything moves up or down, with these swings changing on a day-to-day, or sometimes minute-to-minute, basis. This is not market leadership.
Bob Farrell — one of the O.G. gods of technical analysis — explains why this dynamic is such a problem for any bulls still out there. Spelling it out in rule seven of his famous 10 rules of investing, Farrell said: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.”
And narrow leadership is where we found the market roughly six months ago.
Despite the S&P 500 minting a 28% total return last year, problems were surfacing under the hood.
The following chart from Bank of America technical research strategist Stephen Suttmeier, CFA, CMT shows the New York Stock Exchange advance-decline line. This line serves as a measure of market internals, or what’s going on underneath the surface of the index. It shows how broad, or narrow, participation is in the market at a given point in time.
Signals like a deteriorating advance-decline line can grow and persist for long periods of time — frustrating both bulls and bears.
As we see in Suttmeier’s chart, the S&P 500’s rally that started in Q4 2020 finally stalled out and went sideways throughout most of 2021. This rally then broke to…