We recently highlighted a number of emerging divergences in secondary indexes, which indicated that market breadth had started to deteriorate. Weak breadth has now resulted in a divergence in the Advance-Decline (A-D) Line, which has failed to make a new high for the past month alongside the S&P 500.
While it’s still early, divergences in the A-D Line have historically preceded market downturns, as a narrowing of participation occurs as investors become increasingly selective. For instance, the most recent divergence in the A-D Line occurred in August 2020, prior to a -9.6% drawdown in the S&P 500. As such, this emerging warning flag will remain near the top of our watchlist in the weeks ahead.
James Stack, InvesTech Research, investech.com, 800-955-8500, August 6, 2021
Uncertainty Pushing Dollar Higher
Stocks closed last week generally higher on the heels of a solid jobs report, which may have quelled worries that economic growth was slowing. Nevertheless, equity returns were volatile for much of the week, reflecting ongoing uncertainty as variant strains of the virus spread and concerns rose over the possibility that the Federal Reserve may begin reeling in its asset-purchasing program sooner than expected. Financials led the market sectors, advancing 3.6% for the week, followed by utilities, which rose 2.3%. Crude oil prices closed the week at $68.50 per barrel, down more than 7.0% from the prior week’s closing price. Gold slipped, the dollar rose, and the yield on 10-year Treasuries climbed higher.
Brian W. Kelly, Moneyletter, moneyletter.com, 800-890-9670, August 9, 2021
The Bull is Still Alive
While the bull market has struggled in recent months, it is not dead yet. And as second-quarter reports have increasingly been revealing an economy that continues to expand at faster-than-expected rates, buyers have been rewarding a wide variety of stocks, on both the value and growth side. Here in Cabot Stock of the Week, of course, I preach a diet of variety, the better to build and nurture a resilient, diversified portfolio, so I’m happy to recommend all kinds of stocks.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, August 9, 2021