There is simply no easy way to predict what will happen to the stock market after the presidential election a little over three weeks from today. It is also difficult to determine with any certainty when the seasonal flu season starts in the next month what this means for the COVID-19 pandemic. On top of the above, there is confusion as to the timing of the next stimulus package.
Even when financial markets are healthy and growing at a sustained pace, investors always find a reason to worry. It appears the stock market is now "climbing a wall of worry." The wall of worry is the financial market's tendency to rise higher in front of a host of economic, political, geopolitical events, and issues. The resilience in the stock market often reflects investor confidence that these issues are resolved at some point as the financial market is forward-looking.
The market's ability to climbing the wall of worry often occurs prominently 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 economists will do their parts to confuse the masses by issuing warnings and giving conflicting forecasts. As mentioned before, investors will always find reasons to worry. Those reasons may be legitimate or not. However, it often depends heavily on an individual's perception of the market, his or her investment goals, and risk tolerance level. How an investor interprets the wall of worry is related to the willingness of the individual investor to take on risk in front of market uncertainties.
Technical speaking, perception is the byproduct of the emotional aspect of investing. It tends to be unstable and can change rapidly. What causes markets to sustain higher prices has nothing to do with perception. The market's ability to advance higher is due to the dominant and prevailing trend in the marketplace. After all, Newton's first law of motion that describes inertia suggests a trend that is in motion tends to stay in motion unless acted on by a net external force. Market internals such as market breadth indicators is excellent technical tools to confirm the sustainability of market trends.
Breadth indicators can give a broad picture view of the market and offer an excellent assessment of the internal health of the market in question regardless of what the overall price index is doing. Such detailed information may not be easily detectable by watching a price chart alone. Whether the market rally is broad-based or narrowed-based will likely determine if the uptrend is sustainable and longer-term or short-lived and short-term. By utilizing market breadth indicators in conjunction with other technical indicators, you can better uncover the overall weaknesses or strengths of the price actions and hence the dominating and prevailing trends.
With the above thoughts in mind, enclosed are the charts of the advancing minus declining issues indicator (A-D) on the key stock market indexes such as SPX, INDU, NYA, COMPQ, NDX, MID, and SML.
As you can see, the S&P 500 Index price (black dash line) has correlated closely to its advancing minus declining line (i.e., black solid line). When SPX advance-decline corrects, it has almost always led to an SPX price correction. When the market breadth indicator expands, it has also led to an SPX price rally. The recent contraction in the SPX A-D line from 9/2/20-9/23/20 (6,568.40 to 6,431) prompted the sharp and brief -10.55% SPX price correction during the same timeframe. The ability of the SPX A-D line to rally to a new record high confirms the broadness of the recent SPX price rally. This expansion of market breadth bodes well for SPX to now retest its 9/2/20 all-time high (3,588.11), and possibly to record its all-time price high. This same A-D analysis applied to the other indexes such as INDU, NYA, COMPQ, NDX, MID, and SML also confirms the expansion of the market breadth and hint of new all-time price highs.
In summary, market breadth is one of the better technical indicators to evaluate the sustainability of a trend. Expanding market breadth reflects broad participation in the market in question, which leads to a sustainable and longer-lasting uptrend (rally). For the most part, the market breadth indicators for major US equity markets are now breaking out, and this strongly suggests the respective US equity markets may soon retest their respective all-time price highs.