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Climbing the Wall of Worry?

Stocks ended mixed as regional banks recovered after First Citizens Bancshares, Inc. (FCNCVA agreed to buy parts of Silicon Valley Bank (SIVB). Also, Deutsche Bank (DB) recovered today after sharp selling the past few weeks, leading to a rebound in European stocks. Bank stocks have been one of the worst-performing sectors since the banking turmoil, and recovery may help to stabilize the stock market.


Investors anxiously await another widely followed inflation report later on Friday. The Commerce Department released the Personal Consumption Expenditure Price Index, a closely monitored economic indicator the Fed tracks.


Is the stock market climbing the proverbial wall of worry? Does the ability of stocks to rise despite economic, political, and geopolitical events, etc., signal investors' confidence that any issues are resolvable?


Climbing the wall of worry often occurs during three specific market conditions – at the end of a bear trend, near a market peak, and during periods of sharp market gains.


Market pundits and talking heads can confuse the masses by issuing dire warnings and conflicting forecasts. Since investors are human beings and, as such, emotional creatures, we find reasons to worry. The reasons may be real or imaginary.


However, it often depends heavily on an individual's perception of the stock market, specific investment goals, and risk tolerance levels. How an investor responds to the concerns often translates to the willingness of the individual investor to take on risk or avoid risk in front of market uncertainties.


Technical speaking, perception is the byproduct of the emotional aspect of investing. It tends to be unstable. What causes markets to sustain higher prices has nothing to do with perception. A stock market trending higher depends on various factors, including the dominant and prevailing trends in the marketplace. Based on Newton's first law of motion, a prevailing trend that is in motion will stay in motion unless acted on by an external force. Market internals such as market breadth indicators can also be excellent indicators of internal inertia, direction, and the sustainability of market trends.


Breadth indicators offer an unbiased and broad assessment of the stock market - regardless of what the overall price index is doing. Such information may not be easily detectable by watching a price chart alone. Many stock market indexes are market-cap weighted and are biased by the heaviest market-cap-weighted components. The undue influence does not exist in many of the market breadth indicators. Whether the market rally is broad or narrowed-based helps to determine if the trend is sustainable or short-lived.


By combining market breadth indicators with other technical indicators, an investor can better evaluate the internal health of the marketplace and the next sustainable trend.


Enclosed are updates to the advancing minus declining issues market breadth indicator (A-D) applied to popular stock markets indexes such as SPX, INDU, NYA, COMPQ, NDX, MID, and SML.


In summary, market breadth indicators such as the Advance minus Decline (A-D) line remain one of the better technical indicators to evaluate the sustainability of a trend.


Expanding market breadth reflects broad participation in the market, which often leads to a sustainable and longer-lasting uptrend (rally). Narrowed or lack of market participation can also lead to trend reversals and the start of a long-lasting bear trend.


A brief review of the market breadth indicators for major US equity markets conveys mixed market conditions. Contracting or neutral market breadth readings hint that further technical work and time are necessary before the next directional trend.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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