Advance/Decline

Comparing 1987 versus 1997 and 1998 Advance/Decline lines: 1987’s actually didn’t look nearly as bad as today’s.

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Octophobia…but October 1997 is not at all like October 1987. In 1997, the Advance/Decline line has continued “in gear” with the S&P 500, whereas in 1987, the A/D line peaked out five months before August 1987’s peak.

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Is Warren Buffett doing some very significant selling? I think this might be the case. Leuthold Group three part series on deflation will be sent to clients in September and October. Also, the 10th Anniversary of 1987’s stock market peak: two important “then” and “now” comparisons.

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Today’s great bull market has broken most past behavioral guidelines and precedents. It’s a different animal and could terminate as most manias do...with little forewarning and a waterfall decline.

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There have been some big headline earnings disappointments, but the overall earnings trend remains pretty solid for now. Based on our analysis of up earnings reports/down earnings reports, things look good. The current ratio is still indicative of a strong economy.

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The economic expansion has been so lackluster that we have expected companies to have problems growing earnings. While we have seen this Earnings Momentum decelerate somewhat, the momentum continues to look relatively strong.

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This version of market breadth continues to present a more bearish picture than the other A/D measures.

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I have been employing market breadth data for 32 years, tracking and interpreting a number of variations of advance/decline calculations. Here are some of my conclusions about advance/decline studies.

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While the three month earnings momentum work does not look at all encouraging, there was a glimmer of hope in June. In looking at the individual monthly data, earnings reports released in June were relatively good.

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In November, we had a number of clients inquire about the current status of our earnings momentum monitor, so we have again decided to publish an update of this work. Just a cursory glance at our Advance/Decline chart is all that is needed to see that the earnings momentum is slowing dramatically.

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Last month we presented this original indicator of earnings momentum. At that time, we commented that our quarterly reporting periods might be warped and perhaps misleading. This month we have readjusted the quarterly reporting periods so they now better track the traditional calendar quarters.

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Will the current earnings momentum be maintained in the upcoming months? Even considering the limited history of this study, the current trend would seem to be quite favorable for 1989’s first quarter and perhaps the second quarter.

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Last year, two original earnings momentum evaluators were introduced in this publication. Currently both are giving off constructive readings for 1987 and perhaps beyond. Unfortunately, history seems to indicate this is not necessarily a big positive for stock prices.

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