The evidence remains supportive for stocks, with earnings showing a broadening recovery into their second year despite the stickier-than-expected inflation noted by the Fed. However, it’s crucial to remain vigilant for signs of market tops, often indicated by the early warning signals found in stock price movements. Market peaks usually follow a process, starting with cycle highs, followed by pullbacks and subsequent rallies that may lack broad participation, potentially leading to fewer stocks maintaining upward trends.
While most divergences tend to resolve bullishly, recent record highs in major indices like the S&P 500 and Nasdaq have not been confirmed by several breadth indicators, underscoring the importance of evaluating these divergences. Perhaps the most glaring divergence stems from the percentage of stocks in the NDR Multi-Cap universe above their 50-day moving averages (chart above). While some divergences have persisted throughout the year, many have just surfaced, suggesting that if the market is approaching a peak, it’s in its early stages. Insufficient evidence warrants altering an overweight recommendation on U.S. stocks currently.
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