No doubt the stock market in the U.S. is getting a little ‘tired’ at this point and there are some clear technical indicators that are increasingly pointing to a potential correction soon.  The number of ‘Weekly New Highs’ on the NYSE have been shrinking as the market continues to climb higher.  From 925 in mid-May to 700 in late October and only 325 in late December, the fact that fewer and fewer stocks are hitting new highs is not a good sign for the overall market breadth and the sustainability of the advance.  Also, the Weekly Advances have fallen short of the Weekly Declines for stocks at the NYSE in 4 of the last 6 weeks.  The other short-term worry is that too many advisors and investors are bullish and very few are worried.  While these types of ‘Sentiment Indicators’ can remain in place for  a long time and are usually not enough, in and of themselves, to make the market go lower, they do generally indicate a higher level of risk in the short-term.  The chart below shows that the level of bearishness in the Investors Intelligence Survey, a compilation of reports from investment advisory services, has recently moved to a multi-year low.
Bearish Sentiment Hits New Lows

On the other side, the level of bullishness in the same survey has moved to a multi-year high and both results are supported by data from the AAII (American Association of Individual Investors).   It seems like a year of strong stocks in the U.S. has increased the confidence of investors and advisors.  While increased confidence in stocks is good in the long term, we have to be wary in the short term of excessive optimism combined with increased complacency about risk.

So there are certainly some signs that stocks, particularly in the U.S., might face some short-term turbulence, but is that enough to make investors cash in their chips and head for the sidelines?  Our view continues to be that we are still early in a longer term economic expansion in a low interest rate environment with companies that are better at managing their profits.  That should provide a strong backdrop for continued stock market gains.  After remaining relatively unchanged for close to 15 years, stocks are starting to break out into a new higher range as shown in the chart below. Breaking out of 15 year range

We have seen two similar periods like this in the past century where stocks traded in a range for over a decade and then broke out in a multi-year bull market.  While stocks have already doubled off the 2009 lows, on average, the type of longer-term advance we are talking about would suggest that there is much further to go.  However, we will also see our fair share of corrections and pullbacks along the way.

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