The magnitude of the divergences between the Nasdaq Composite & the Nasdaq Advancing vs. Declining Issues today is much more comparable to those leading up to the 2000 tech bubble market top & subsequent bear market than those leading up to the 2007 market top (compare the differential between both the magnitude & the slopes of both lines). During a healthy advance, such as that off the 2002 lows, the 2009 lows, late 2012-early 2014, etc.., the A/D line will rise along with major stock indices, indicating broad participation among the majority of the stocks within that index. Divergence between an index & the A/D ratio indicates that fewer & fewer stocks are advancing, typically the mega-cap, over-owned & over-loved stocks (think FAAMGs) and such divergences has historically been a precursor to major market tops.
While the primary trend remains bullish for now & these divergences aren’t anything remotely close to a sell signal, they do help provide a glimpse into just how powerful the next bear market is likely to be once this aging bull, the second longest in history & only 13 months shy of becoming the longest ever, will be. The longest bull market which spanned from October 1990-March 2000, was followed by a drop of nearly 80%. The profits to be made shorting the upcoming bear market will be nothing short of staggering, although there will be plenty of asset classes that will benefit from money flows out of stocks not to mention bear market rallies, which provide some of the most profitable long-side trades in very short order due to the combination of short-covering plus dip buyers.
Although market internals continue to deteriorate with negative divergences still building on the monthly time frames all the way down to the daily & even 60-minute time frames on the US stock indices, we simply don’t have any half-decent sell signals or evidence of a trend reversal. As long as the primary trend remains bullish yet the risk-to-reward ratio in the broad market remains very unfavorable, I will continue to focus my efforts on trading individual stocks, sectors, commodities & other securities with the most attractive R/R profiles & clearly bullish or bearish technicals.