As the bull market has run longer and higher, many have been speculating about whether we’re nearing a market top. In a recent Bloomberg View column, Barry Ritholtz turns to Paul Desmond of Lowry’s Research — who has been analyzing markets for five decades — for some cold, hard data on the topic.
“Rather than focus on the usual noise, Desmond suggests anyone concerned about a top should be watching for very specific warning signs,” Ritholtz says. “He notes the health of a bull market can be observed by watching internal indicators that provide insight into the overall appetite for equity accumulation.” Four key indicators Desmond says to watch: New 52-Week Highs, Market Breadth (Advanced/Decline Line), Capitalization: Small Cap, Mid Cap, Large Cap, and Percentage of Stocks at 20 percent or greater from their recent highs.
With new 52-week highs, for example, it’s a warning sign when a major index is making new highs but the number of its component stocks making 52-week highs starts to dwindle, Ritholtz says.
In terms of capitalization issues, meanwhile, it can signal trouble when small caps start to struggle. “Desmond has observed that, historically, the first group to roll over is the small caps,” Ritholtz writes. “The bottom 50 percent of the market by cap size will begin to falter first, while the rest of the market appears healthy. The usual time period is eight months prior to a top for the smaller issues to fade. The mid-caps — the next 35 percent or so of equities — will falter four to six months before the high.”
Right now, according to Lowry’s, these factors indicate that “the weight of evidence continues to suggest a healthy primary uptrend with no end in sight.” While that’s no guarantee, Ritholtz says Desmond makes a pretty convincing case.