Wall Street’s Best Editor’s Note: As the stock markets continue to set records, market pundits and investors alike are wondering if we are near the top and should ‘keep our powder dry,’ take profits on our more speculative holdings and begin to concentrate on a more conservative portfolio.
For more than 30 years, investors and national media outlets including The Wall Street Journal, Forbes, Kiplinger, USA Today, U.S. News & World Report and Bloomberg, have turned to James Stack, president and founder of Stack Financial Management, to ask his opinion about the state of the markets.
Jim is also the editor of InvesTech Research, and a regular contributor to Wall Street’s Best publications. I have known Jim for more than 20 years and have long admired his ‘safety first’ philosophy and successful investing strategy backed by reams of data that he has been collecting and analyzing for decades.
Jim’s company was just named to Barron’s 2016 list of the “Top 100 Independent Financial Advisors” in the United States, his ninth recognition in the 10 years of Barron’s list and one of many accolades that he has received over the years.
Bottom line, when Jim speaks, the experts listen. And in this excerpt from a recent issue of InvesTech Research, he makes a strong case for a continuing bull market.
Technical Outlook—Still Getting Stronger
Undoubtedly, the most impressive turnaround this year has come in stock market leadership and breadth. These technical indicators were clearly in bearish territory at the start of the year, but the improvement in both gauges following the February correction low is nothing short of remarkable—better yet, they continue to strengthen.
Downside leadership has all but disappeared
Our Negative Leadership Composite (NLC) is comprised of two parts, both based purely on downside leadership in the market. When this gauge shows “Distribution” (*2—shaded area in the bottom graph below), it means that selling pressure is increasing and investors are dumping stocks, even at a loss. A drop to -100 signals the most dangerous time for stocks, with the highest probability of a bear market. Heading into 2016, the NLC had already logged six months of bearish Distribution near -100, but by March that started to quickly dissipate as the market advance strengthened.
As selling pressure eases, a bullish “Selling Vacuum” (*1—top portion of the graph) can appear. If strong enough, it usually indicates the start of a new bull market or a new bull market leg. Generally, the stronger the Selling Vacuum, the better the potential for gains. This year, an increasing Selling Vacuum emerged in March with the NLC moving firmly into bull market range above +20 in April. The Selling Vacuum is currently at +47 which, if history prevails, should carry strong positive implications for the months ahead.
Breadth – Continuing to lead upward
Breadth measures participation, and a negative divergence in breadth is one of the most reliable advance warning flags of a bear market. One of the easiest ways to analyze breadth is with the Advance-Decline Line, which is a continuous sum of daily advancing stocks on the NYSE minus declining stocks. As shown by the arrows, the A-D Line weakened well ahead of past final bull market tops. The divergence in 2015 was a major cause for concern; however, this indicator has rebounded sharply and is once again leading the S&P 500 with the strongest advance since the start of the bull market in 2009.
Coppock Guide – An important “Buy” signal
The Coppock Guide was developed by Edwin Coppock in 1962 specifically to identify major buying opportunities for investors. Although the computation of this Index is rather complicated, it is simply an oscillator that reverses direction with long-term market momentum. Since major market bottoms are usually sharp reversals, this gauge works amazingly well at triggering “buy” signals—and it has rarely been wrong.
When the Coppock Guide drops below 0, a mere 1-point uptick in this indicator can usually be treated as an excellent buying opportunity—and that is what we’re seeing today. In February this year, the Coppock dipped into negative territory for the first time since 2008. That set the timer for the next reversal which came in July, confirming a new buy signal.
The graph above shows that the Coppock Guide continues to rise and will close above zero this month. While this “buy signal” is not coming off the deeply oversold readings we prefer to see, it is still bullish. Previous shallow reversals (marked in red on the graph) have still led to significant gains in the S&P 500 averaging 6.4% over the following 3 months, almost 12% at 6 months, and over 25% at 12 months.
Bellwether Index – The canary in the coal mine?
Bellwethers are economically- and monetarily-sensitive stocks that typically weaken ahead of the broad market at major market tops. Our Bellwether Index is comprised of stocks from the consumer discretionary, financial, transportation, and utility sectors. In short, it is designed to warn investors when to start battening down the hatches for the next bear market (see previous market peaks).
We were surprised last year when this indicator failed to weaken prior to the May highs, but with 20/20 hindsight that obviously wasn’t the final market top. If monetary pressures build on the Federal Reserve to normalize interest rates, we believe this Bellwether Index could start showing a negative divergence later this year.
Like the proverbial “canary in the coal mine” it could prove a valuable tool in getting us out of danger before a major bear market strikes.
Happy investing,
Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks
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