Is Weakening Breadth Warning of a Pullback or Major Top?

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Divergences in market breadth have increased the probability for a pullback in the US stock market but chances are still quite low that we are at or near a major market top, writes Jonathan Krinsky in a recent note to Financial Sense.

Last month, Krinsky, Chief Market Technician for MKM Partners, told listeners on our podcast that the Dow Jones Industrial Average was likely to break above 20,000 and that the outlook for US stocks was still positive based on four "bull market checks": trend, momentum, breadth, and sentiment. The only one signaling caution, he explained, was sentiment since investors had become much more optimistic after the Trump election.

Recently, however, while major market indices have made a relentless push to new all-time highs, numerous headlines are now reporting concern over weakening breadth, i.e. less and less individual stocks participating in the advance.

Given his remarks last month, we emailed Krinsky to get his thoughts on whether the US stock market may be faltering due to "breadth problems".

Here's what he had to say:

"As far as the cumulative Advance-Decline lines go they are still hitting new highs which is a good sign for the bigger picture.

sp500 advance decline

nyse advance decline line

There are some negative divergences on the percent of stocks at 52-week highs.

percent 52 week highs

And the percent of stocks above their 50-day moving average is also diverging…

percent above 50 dma

So I think there is enough of a negative divergence to think maybe we see a small pullback here, but not enough to suggest a meaningful top. That’s how I would view it now."

Listen to our interview with Jonathan Krinsky or any of our recent podcasts by clicking here. Become a subscriber and gain full access to our premium weekday interviews with leading guest experts by clicking here.

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