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The chances for an imminent correction just cratered

Jason Goepfert
2021-10-26
The advance/decline line just broke out to a new high, which suggests a smaller probability of a major decline in the months ahead.

The most benchmarked index in the world is trying to hold a breakout to record highs. Supporting its case is the fact that most of its stocks have been rising, and breadth within the index confirms its good performance.

Even though the S&P 500 settled back a bit on Friday, most of the stocks in the index gained ground. That was enough to push the S&P's Cumulative Advance/Decline Line to a new high, the first in more than 30 sessions.

S&P advance decline line has broken out to a new high

Among other major indexes, the Nasdaq 100 has also seen a breakout in its Advance/Decline Line but other indexes have not.

Many times over the past couple of decades, we've discussed the idea that stocks are less likely to suffer a large drawdown in the following months when the advance/decline line breaks out to a new high.

Since 1928, the S&P 500 was three times more likely to suffer a 10% decline at some point within the next three months if the S&P's Advance/Decline Line was not at a multi-year high. When it did break out to a new high, there was only a 4.6% probability of a 10% or greater decline within the next few months.


What else we're looking at

  • More details on the Advance/Decline Lines for other indexes
  • Probabilities of various sized declines after the S&P's A/D Line makes a new high
  • The S&P just triggered an ATR reversal signal
  • Why the Consumer Staples sector looks interesting right now

Stat box

The VNQ real estate ETF has averaged an inflow of more than $100 million per day over the past week, the 15th time it has crossed that threshold in the past decade.

Etcetera

Discretionary spending. Investors are paying up for Consumer Discretionary stocks, and the 10-day Optimism Index has climbed above 77%. That ranks among the top 50 days since the fund's inception when the XLY fund was in a defined uptrend.

Optimism on consumer discretionary stocks is high

Nippon nipped. The Japanese yen has been mired in a downtrend and pessimism is rampant. The Optimism Index on the yen, near 20%, is the lowest since 2015.

Extreme pessimism in the Japanese yen

No fear. Options traders have basically given up on betting on a quick, severe decline in stocks. That lack of concern has caused the implied volatility of shorter-term options to be significantly less than longer-term ones.

The VIX term structure shows complacency

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