John, it is not merely the duration of the a/d divergence that has technicians concerned...it is the MAGNITUDE of the divergence that's unsettling. there are btw. lots of in-depth studies out there that show that an ever-shrinking pool of stocks is responsible for most of the advance in the indices. as LG remarked earlier today, it used to be that 50 stocks were driving the gains in the S&P 500, and it's more like 30 now. there is no doubt whatsoever the the rallies get narrower and narrower. and this is a phenomenon that has been observed throughout history: the longer in the tooth a bull market gets, the more it tends to narrow, and what's more, the gains in the small group of stocks driving the indices get ever more outsized. there is simply no getting around the fact that the expansion in earnings multiples has been much greater than the expansion in earnings and earnings growth rates. it is the excess liquidity in the system that's been driving this, plus the trend toward indexation. as Hickey has mentioned, the increase in the market cap of the six biggest tech companies last Friday alone equaled the total value of the better part of the U.S. tech industry in 1990. this is absurd, plain and simple.
i do not deny that it may get even more absurd, in fact i expect it to. and if you're nimble you can surely profit from this, after all, who cares? whatever the market pays is o.k. at the time. but long term investors trusting in a forever rising stock market better think again...the writing is on the wall.
regards,
hb |
