Editor's note: As we've mentioned here at the Chaikin PowerFeed, we've seen some big swings in the market this year...
And right now, the biggest worry on investors' minds seems to be when this AI bull market will end. To provide some insight, we're turning the Chaikin PowerFeed over to Brett Eversole...
Longtime readers will remember Brett. He's an editor at our corporate affiliate Stansberry Research. And as he discusses in today's essay – which was published in the June 9 edition of his free DailyWealth e-letter – investors should keep an eye on one concerning signal about the health of the market...
Every bull market climbs a Wall of Worry...
Folks are always looking for a reason to stress. Even when times are good, they try to get ahead of the next calamity.
The bearish argument always sounds intelligent. For instance, assuming the war with Iran will lead to economic disaster sounds prudent and wise. But that's not what has happened.
That's because events rarely go as badly as the bears expect. When the worst doesn't materialize, prices rise... And so, the market climbs the Wall of Worry.
Still, there can be good reasons to worry – even in a powerful bull market.
One real concern is beginning to show up right now. And while it isn't a reason to sell today, it is a signal to watch in the coming months.
Don't Predict the Future... Watch the Market's Health
Hunting for the next market "boogeyman" usually means trying to predict the future.
Folks try to peek around the corner to see the next black swan coming. But the problem with black swans is that, by definition, they're unpredictable. You can't see them until it's too late.
Fortunately, we don't need to try to predict the next crisis. Instead, we can watch the health of the market itself. Over history, that has been a better way to spot risks to a bull market before problems arise.
One way to do this is to look at the advance/decline line for the S&P 500...
This signal takes the number of stocks that rose minus the number of stocks that fell each day. The next day, you calculate that number again and add it to yesterday's number. Over time, that builds a cumulative series that goes up when more stocks are rising... and down when more stocks are falling.
This gives us a look at the overall market's health. In a strong bull market, the advance/decline line should hit new highs when the overall market does. That shows good market breadth... which means many stocks are rising together.
On the other hand, if the relationship breaks down, that means only a handful of stocks are driving the rally. Unfortunately, that's what has happened in recent weeks. Take a look...
The overall market ripped to new highs after the March bottom. The advance/decline line kept up for a bit... It broke out to a new high in mid-April, showing that most stocks were participating in the rally.
Over the past month, though, the advance/decline line hasn't kept up. It has been falling, which means more S&P 500 stocks are moving lower than moving higher.
Importantly, that doesn't mean the bull market is over. This kind of divergence can last for months... even years.
During the dot-com boom, the advance/decline line topped out more than two years before the market did. Not only that, but if the laggards today start moving higher again, the problem could resolve on its own.
So this isn't a sell signal. It's a warning sign.
If the advance/decline line keeps falling and the market rolls over, it could mean a true bear market is on the way... But we're not there yet. We'll keep an eye on this signal in the weeks ahead.
Good investing,
Brett Eversole
Editor's note: Next week, Brett's Stansberry colleagues and hedge-fund veterans Whitney Tilson and Gabe Marshank are going on camera to share a big warning...
It has to do with the SpaceX IPO – and how a little-known change to major stock market index rules could have far-reaching consequences for millions of investors.
As Whitney and Gabe say, the next major market disruption might come from structural changes that are covertly changing where trillions of investment dollars are forced to go.
On Tuesday, June 16, Whitney and Gabe will share all the details on how to protect yourself. Learn more and register for this free briefing here.
