What Are the Market Internals Saying?

There are many ways to look at market technicals; one way is by looking at the internals. To do this, we like to look at the advance/decline line. This measures how many stocks are advancing versus declining on a various index. If more stocks are advancing, that is a sign of underlying strength. The flip side is, if many stocks are declining and the overall index hasn’t yet broken lower, it is a warning sign something could be wrong.

Turning to the NYSE cumulative advance/decline line, it recently broke above a trend line going back nearly 10 months. This could be viewed as a positive development under the surface.

NYSE Advance/Decline Line Showing Improvement
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Source: LPL Research, Bloomberg 04/04/16

 

The S&P 500 cumulative advance/decline line made a new all-time high last week. Considering the S&P 500 is about 4% away from an all-time high and the advance/decline line is already at a new high, this is another positive development of potential strength under the surface. Remember though, this doesn’t mean there can’t or won’t be a pullback, but it does suggest that any pullbacks could be a potential buying opportunity as the underlying components are strong overall.

New Highs for the S&P 500 Cumulative Advance/Decline Line
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Source: LPL Research, Bloomberg 04/04/16

 

We asked David Tonaszuck, CMT, for his thoughts on the S&P 500 cumulative advance/decline line. Here is what he had to say.

“Recently, the S&P 500 Index cumulative advance/decline line has reached new all-time highs, while the S&P 500 Index daily price chart has not. This is referred to as a bullish divergence, which suggests that the momentum in the cumulative advance/decline line may help lead the daily price chart higher, thereby increasing the likelihood that equities re-test the top end of the range’s resistance once again.”

In conclusion, we like large caps (which compose the S&P 500), and seeing the strength in the S&P 500 cumulative advance/decline line indicates this group should continue to potentially outperform.

IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

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