American Consequences - August 2020

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Advance/Decline Line The advance/decline line recently hit new highs

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Source: Bloomberg

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highs. But the advance/decline line – which covers more stocks than the S&P 500 – hit a new high in June... and has continued to rally since. This is exactly what we want to see. When the advance/decline line is hitting new highs ahead of the market, it means the rally is broad and healthy. It tells us that a bust isn’t likely. While this indicator didn’t flash a warning ahead of the COVID-19 crash, that was a true black swan event. It wasn’t caused by

a crack in the underlying economy or the health of the market. When those underlying issues are present, the advance/decline line is a perfect and simple way to see the problems with the bull market’s health. It gave plenty of warning ahead of the dot-com bust and the Great Recession crash, for example. The chart below shows the advance/decline line during the late 1990s. In that case, it peaked years ahead of the overall market.

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Advance/Decline Line

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This indicator started falling years before the dot-com peak

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Source: Bloomberg

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American Consequences

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