Rounded Tops

The pattern of rounded tops continues to hold. As this bull market in equities continues to age, fewer stocks participate in each rally. Eventually, the majority of stocks start trending lower and a bear market takes hold. In the chart below, I show the percentage of stocks in the S&P 100 Index that are trading above their long-term 200-day moving average. (This is the broad definition of an uptrend). In 2018, 92% of the largest 100 stocks by market cap were in uptrends. By the end of 2018, that number had plummeted to just 13%. In Q1 2019, we experienced an aggressive 20% rally in the stock market, recovering the majority of the losses sustained in Q4 2018. However, today, just 69% of the top 100 US stocks are in uptrends. If this pattern continues to hold, with an increasing number of large US stocks breaking down, the broader market will follow lower. We should at the very least expect a correction shortly that will retrace a significant percentage of the recent rally. After that, I will assess our next move.

 
 

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