The "average stock" is up about 50% since the dark interim period at the height of the US
fiscal fight in 2011 and when the EZ was in heavy crisis mode. The market has blown past my
modestly uptrending weekly cyclical fundamental indicator and 12 month corporate profits,
which are up only about 10% over this interval. The market has even outdone the Fed,
which has let its balance sheet expand by 15% since the late summer of 2011. Also, over
the same period, credit quality spreads between investment grade issues have not narrowed
at all, an uncommon development in an advanced strong cyclical bull market.
The advance in stocks reflects an upward revaluation of the price earnings ratio to reflect
both continued US economic expansion and low inflation. But, this period has not been much
of a sweet spot at all in the economy given the scant progress of profits and but modest
growth which has also had a few shaky moments.
Normally a cyclical bull market turns increasingly risky as short term rates rise, inflation
accelerates and liquidity growth subsides. There is none of that in sight now. The risk
such as it is comes from a strongly advancing market contrasted with an underperforming
economy. The danger here is clear. Rising confidence which is overriding rather mediocre
economic / business performance can evaporate quickly if unpleasant realities intrude.
The shock absorber of strong fundamental performance is simply not there.
This week I look at the non-capitalization weighted Value Line Arithmetic and the broad NYSE
a/d line. First up is the $VLE
The VLE has made new all time highs in successive years and strongly outperformed the SPX
until mid - 2011. Since then relative performance has been more checquered but when the VLE
has lost its performance edge, the general market has tended to suffer. Note that the VLE
has started to lose relative strength again against the SPX (bottom panel) and that index RSI
and MACD have begun rolling over as well. Also, be advised that this index, as volatile as it
can be, can well take its sweeet time making an interim top and that should stronger economic
data come along , it can reverse positively against the SPX.
Next, let's move on to the NYSE advance / decline line. $NYAD The a/d line remains in a
strong uptrend and has been underscoring the strong nature of the cyclical advance. The a/d
line has recently successfully tested its important 6 wk. m/a. and the broad market is going
to keep on rising as long as the a/d line stays over the 6 wk m/a. Trouble usually does not
start until cumulative breadth gets tangled up with its near term m/a, and when it does, well
that can be a bell ringer. Note as well that the a/d line is running at a hefty premium to its 40
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!