Keep in mind, the Fed acted to raise its target lending rate on only two other occasions when the U.S. economy had been growing at a sub-par clip (1948, 1980). In less than a year’s time, in both instances, a new recession emerged.
That is why it is crucial to pay attention to what stocks and bonds are saying about the potential for recessionary pressures to get out hand. For instance, in spite of the media focus on famous benchmarks like the Dow 30, the NASDAQ 100 and the S&P 500, the New York Stock Exchange (NYSE) still remains the world’s largest stock exchange by both trade value and market capitalization. It follows that tracking the NYSE Composite is crucial for understanding broader U.S. market implications.
The NYSE Composite measures the performance of all stocks listed on the exchange. For nearly a year now, movement on the index has been down, up, and ultimately, sideways.
Based on what one can see about the NYSE Composite, one might describe the investing environment as “choppy.” Yet choppiness is hardly a sure-fire sign of imminent deterioration. In fact, this very same index has a more prevalent tool for identifying trends called the Advance-Decline (A/D) Line. In the chart below, one can see the relatively healthy A/D Line sloping upwards from one year ago through late April of this year.
Since late April, however, the number of declining stocks have started to put pressure on the number of advancing stocks. The possible weakening of market internals can be problematic. In fact, other than the September-October pullback in 2014, there hasn’t been a genuine threat to the broader market’s bullish upswing since the euro-zone debt disaster in the summer of 2011.
Technically speaking, the stock market uptrend remains intact. Yet you should not fall victim to a siren’s song called, “Where Else Are You Gonna Go?” There will come a time when 0% interest in a cash account or a 2.25% annual yield on a 10-year treasury bond will be far more preferable than overvalued equities. Keep an eye on the A/D line, and be mindful of a breach below the 200-day moving average.