Are Stocks in Trouble? Here’s an (Almost) Sure-Fire Sign
Fractured markets tend to be unhealthy markets
by Bob Stokes
Updated: January 04, 2023
When the major stock indexes begin to act differently from each other, otherwise known as a fractured market, this is usually a sign of an unhealthy market.
We've seen this time and again, including just before one of the biggest bear markets in modern times.
On Sept. 14, 2007 our U.S. Short Term Update mentioned the upward price action in the blue-chip indexes, then showed this chart and said:
While the DJIA and S&P retained a bid, the NASDAQ lagged badly, failing to confirm the blue-chip rally by remaining beneath its Wednesday high (NASDAQ 100). A fractured market is oftentimes an unhealthy market and the divergent behavior yesterday remains consistent with the view that the entire [upward] push is countertrend, an opinion that we have maintained.
Less than a month later, the Dow Industrials hit a then all-time high before sliding into a bear market which saw the senior index lose more than half of its value.
Now consider this analysis from our U.S. Short Term Update:
The dichotomy of performance between the U.S. stock indexes is becoming pronounced. While the DJIA and S&P 500 are at new highs, the NASDAQ is lagging. Moreover, the Russell 2000, S&P MidCap 400 and Value Line Composite, are well below their prior highs on November 8. We'll see how these fractured trends resolve in the early part of the new year.
You may be interested in knowing that this analysis was provided on Dec. 29, 2021.
Less than a week later, the Dow Industrials and S&P 500 hit their most recent all-time highs and have been in a downtrend since.
Why is all this relevant now?
Well, our Dec. 28, 2022 U.S. Short Term Update presented a chart titled "A Fractured Trend Leads to Further Selling" with an explanation of the behavior differences between the major stock indexes.
Our Dec. 30 U.S. Short Term Update followed up by saying:
As memorable as 2022 may be for investors, it is just the appetizer to the main course...
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