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Bad News for Market Bears: The Summer of Discontent

Despite “cracks” under the surface, a few key liquidity indicators highlight that the path of least resistance remains up, which could spell further pain for the market bears this summer.

A sad stock market bear enduring a summer of discontent as liquidity remains high

For traders with a bearish bent, the year so far has been one of enduring frustration. Rarely has the market shown so many sub-surface “cracks” and other signs of weakness for an extended period without producing a serious decline in the major indexes. However, the bad news for the market bears is that this dynamic looks to continue through the summer.

The last few months have provided the bears with plenty of grist to make their case that the major averages are vulnerable to a decline. Market breadth by many measures, for instance, has been nothing short of terrible.

On that score, consider that the number of stocks making new 52-week lows on the NYSE has exceeded 40 on most days in the last few weeks. Cabot’s Two-Second Indicator regards more than 40 new lows for several days to weeks in a row to be a sign of above-normal internal selling pressure.

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Even more eye-opening is the number of Nasdaq-listed issues that have made new lows in recent weeks. In fact, not only are the number of Nasdaq stocks making 52-week lows in the triple digits on many days, there have been numerous instances in recent weeks of the new lows exceeding the new highs. Very seldom has this dynamic continued without a significant pullback or correction in the broad market at some point.

With so many market breadth indicators flashing weak signals, why have major indexes like the Dow Industrials, the Nasdaq Composite and the S&P 500 managed to either tread water or trend higher?

The answer is that liquidity—one of the market’s most important factors—is still ample enough to keep the leading stocks at elevated levels. That said, let’s take a look at some of the most important liquidity indicators for some additional insights.

While breadth readings in the NYSE new highs and lows have been weak, a more valuable statistic has shown considerable strength in recent months. I’m referring to the NYSE Advance-Decline (A-D) line, which measures how many stocks are participating in a market rally or decline. In its own right, the A-D line is a valuable measure of liquidity, as explained by the respected market technician, Tom McClellan, who considers the A-D line to be one of the best liquidity measures available to investors. He writes:

“[Advance-decline] statistics are valuable because they give some of the best indications about the health of the liquidity that is available to the stock market. A small amount of money can be employed to make a handful of stocks go up or down, and if they are the right stocks then even the major market indices can be moved. But to affect the breadth numbers, which measure all of the stocks on the exchange, requires major changes in the liquidity picture. The available money has to be so plentiful that it can be spread far and wide in order to make the majority of stocks close higher, and especially so in order for the market to show positive breadth for several days.”

2 Liquidity Indicators That Could Be Bad News for Bears

Here’s what the NYSE A-D line looks like going back over the past year. As you can see, it shows a conspicuous degree of overall health in a market that has otherwise been wracked by internal divergences of late. The takeaway from this indicator is that liquidity has been abundant enough to keep the market’s leading stocks going forward, in turn helping the major averages.

nyse-advance-decline-6-20-24.png

Meanwhile, credit spreads—another key indicator of liquidity—remain low, which further confirms informed investors aren’t expecting major trouble any time soon. Below is a chart featured in a recent blog by the Wall Street economist Scott Grannis, who pointed out that this particular indicator “is the bond market’s way of saying that investors are quite confident in the outlook for corporate profits,” despite higher interest rates, because liquidity remains profuse.

corporate-credit-spreads.png

The takeaway here is that as long as these indicators remain strong (thus showing abundant liquidity), the market’s overall path of least resistance should be assumed to still be up. And that in turn means a “summer of discontent” is likely ahead for the bears.

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Clif Droke is a Senior Analyst at Cabot Wealth Network. For over 20 years, he has worked as a writer, analyst and editor of several market-oriented advisory services and has written several books on technical trading in the stock market, including “Channel Buster: How to Trade the Most Profitable Chart Pattern” and “The Stock Market Cycles.”