Currently, the stock market rally has been defined by a complete lack of Leadership. Leadership is a concept that I was introduced to by James Stack over 25 years ago. He used it as one of his tools to identify the 1987 top and the early 2000s dot.bomb. Since then, I have witnessed numerous market technicians try to use Leadership, or the lack there of, to discern the health of a stock market rally.
The basic idea behind Leadership is that a large percentage of stocks should participate in a healthy stock market rally. When very few stocks participate in a rally, leadership is weak. And, never in my four decades of stock market experience have I ever seen leadership so incredibly weak. Leadership can be measured in many ways, but I focus on the simplest: the number of stocks hitting new 52-week highs. Here is an updated chart illustrating that just 50 or so stocks traded on the NYSE exchange are hitting new highs, even as indexes are sitting at new highs.
The NYSE is comprised of around 2,200 stocks. So, if only 55 stocks are hitting new 52-week highs as of yesterday, less than 2.5% of all stocks traded on the exchange are fully participating in this rally. As seen back in November and December, this figure was much higher and approaching 400. I looked at the history and the new high figure has always been north of 350 during other peaks.
The utter lack of leadership in this current market is truly unprecedented. But what does it mean? Does it mean an imminent collapse in the stock market? Not exactly. I don't view leadership in a vacuum, but more so as a tool that should be taken under advisement along with a handful of other instruments. I also like to look at market breadth, or the number of stocks participating in a rally. For this indicator, most analysts use the "Advance-Decline Issues" figure. This is the number of stocks going up in a day versus the number of stocks going down in a day. Given that the indicator isn't as strong as it was last month, it also raises cause for concern.
On top of these two indicators, I like to look for bearish divergences, of which there are a few, but the most critical remains in the bullish camp. Typically, financial stocks lead the market either way and, currently, financial stocks (measured by IYF) are hitting new highs, meaning they are still leading the market higher. Another leading sector is junk bonds which, like financials, are leading the market higher. Other highly cyclical sectors are lagging. Sectors like REITs and small-caps are well below their 52-week highs. I would like to see financials and junk bonds underperform by some measure before becoming more pessimistic toward the stock market.
The totality of all these indicators certainly gives us reason for concern. But, the market continues to push higher and given that "the trend is your friend", I'm not prepared to turn bearish yet. Our equity exposure is still on the high end. I'm becoming terribly anxious and finding it hard to maintain existing exposure or build new positions. But I'm not selling any "beta" at this point.