The nearly four-year-old bull market in stocks might be in its waning days, one research firm is warning.
Ned Davis Research said on Monday that it’s spotted a possible bad omen for stock investors: while the major indexes have clawed their way back to records, only a minority of individual stocks, sectors, and markets around the world are joining in the rally — a sign that the investment outlook may not be as bullish as it seems on the surface.
The firm pointed to the idea that stocks typically confirm new highs when they’re on a sustainable uptrend.
Major US indexes hit new records last week amid the latest rebound in tech stocks and renewed hopes for a deal to reopen the Strait of Hormuz. But the picture is less optimistic from a global perspective: only 25% of ACWI component markets are at their highest level in at least a year, and less than 5% of the global index is at a record high, Tim Hayes, NDR’s chief global strategist, said.
Warning signs are also flashing within the S&P 500. Besides the financials and industrials sectors, most areas of the benchmark index are not at record highs, Hayes added.
Meanwhile, among all the US stocks NDR tracks, the percentage of stocks reaching a new 30-day high has been trending lower and has generally stayed below the 25% threshold. The indicator generally signals a bullish outlook if the percentage of stocks reaching a new 30-day high surpasses 44.5%, Hayes said.
“Based on the lesser of new highs and new lows divided by issues traded, high readings reflect worsening breadth. And they can warn that the market is experiencing a blow-off, a narrow bull market finale,” Hayes wrote. “Combining issues from the NYSE, AMEX and NASDAQ, the Combination High-Low Logic Index has been reaching its highest levels on record, a bear market warning.”
Hayes said the firm would turn more bullish on stocks if they saw market breadth — a reflection of how many stocks are driving an overall uptrend or downtrend in the market — increase. The firm is also looking for a higher percentage of new highs across various markets around the world, as well as in individual sectors and stocks.
“Otherwise, the lack of new high confirmation will warrant caution — don’t assume that we’re back to risk-on again,” Hayes added.
Investors hit pause on the latest rally this week with fresh inflation reading on the horizon. The latest consumer price index report on Wednesday will set the tone for markets and shape the outlook for interest rates heading into the final months of the year. Hope, meanwhile, has started to fade again for a near-term deal to reopen the Strait of Hormuz, which would alleviate a major overhang for stocks and ease some of the upward pressure on inflation.
