"This Is a Warning of a Bear Market": Researchers Signal the End of the Rally

The stock market bull run, which has lasted for nearly four years, may be entering its final phase, warns research firm Ned Davis Research, according to Business Insider. The researchers claim to have identified a potentially alarming signal for investors: too few stocks are now participating in the rally to sustain the growth of the overall market.

Although major stock indices have once again risen to record levels, an increasingly small proportion of individual stocks, sectors, and markets around the world are participating in the rally, according to Ned Davis Research. This may mean that the market outlook is not as positive as it seems at first glance, writes Business Insider. In a sustained uptrend, new highs in major indices are typically confirmed by gains across a broad range of stocks, the firm notes.

Last week, the major U.S. indices hit new record highs amid a fresh rally in tech stocks and investors’ hopes for an agreement on the Strait of Hormuz. However, on a global scale, the picture is less positive: only 25% of the markets included in the MSCI All Country World Index are at their highest levels in at least a year, and fewer than 5% of the global index’s components have reached all-time highs, according to NDR Chief Global Strategist Tim Hayes.

Warning signs are also emerging within the S&P 500. According to Hayes, with the exception of the financial and industrial sectors, most of the index’s sector segments are not currently at record highs. Among all U.S. stocks tracked by NDR, the proportion of stocks hitting 30-day highs is declining and remains largely below the 25% mark. According to Hayes, the Ned Davis Research indicator typically signals a positive market trend when the proportion of stocks hitting 30-day highs exceeds 44.5%.

“If you take the smaller number of new highs or lows and divide it by the number of traded issues, high values indicate a narrowing of market breadth. They may signal that the market is experiencing a final surge—the concluding stage of a narrow bull market,” Business Insider quotes Hayes as saying. “If you combine stocks on the NYSE, AMEX, and Nasdaq, the Combination High-Low Logic indicator (a market breadth indicator—Oninvest) reaches its highest levels in recorded history. This is a warning sign of a bear market.”

According to Hayes, Ned Davis Research would take a more positive view of the outlook for stocks if it saw an improvement in market breadth—that is, an increase in the number of stocks contributing to the rise or fall of the indices. The firm would also like to see an increase in the proportion of new highs across various global stock markets, as well as among individual sectors and stocks. “Otherwise, the lack of confirmation of new highs should be a cause for caution—one shouldn’t assume that investors have once again shifted into a mode of heightened risk appetite,” Hayes noted.

This week, investors took a breather following the latest rally as they awaited new inflation data. The Consumer Price Index report, due out on Wednesday, could set the tone for the markets and influence interest rate expectations in the final months of the year, Business Insider reports. At the same time, hopes for a swift agreement to reopen the Strait of Hormuz have begun to fade again, the publication notes. Reopening the strait to shipping would remove one of the key factors putting pressure on the stock market and would ease some of the inflationary pressure, Business Insider explains.

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