Is there a bearish sentiment? But this indicator is giving a buy signal!

The S&P 500 index is usually considered a barometer of the U.S. economy, but sometimes don't be misled by it.

The current S&P 500 index is different from the past. Nowadays, only a few companies account for the majority of its weight in the S&P 500 index components.

The few companies refer to FAAMG companies, including Meta platform (FB), Apple, Amazon, Microsoft, and Alphabet.

These 5 companies have a combined market cap of 22.3% of the S&P 500 index. If we include Tesla, with a market cap of $1.1 trillion, these 6 companies account for a quarter of the S&P 500 index.

Therefore, although the S&P 500 index is supposed to represent the broad market, often its movements are directly linked to these large technology giants.

Smaller companies may face challenges, and their stock prices may fall, but if the stock prices of these 6 tech giants rise, the S&P 500 index may also rise. Therefore, it is often difficult to distinguish whether a bull market is truly healthy or simply supported by a few companies.

One way to evaluate this is to look at the ups and downs of the S&P 500 index.

The advance-decline line is a simple evaluation indicator, calculated by subtracting the number of declining stocks from the number of advancing stocks on a given day. If there are more advancing stocks on that day, the advance-decline line will rise; if there are more declining stocks, the advance-decline line will fall.

In a typical bull market, the advance-decline line rises when the market is going up.

When the advance-decline line declines while the market continues to rise, you need to be cautious because this means that the gains are mainly concentrated in a few companies.

This was the case in the late 1990s, and as you have seen, the internet bubble burst shortly thereafter.

The current advance-decline line looks nothing like that of the late 1990s.

As the market rises, the advance-decline line also rises. By looking at this indicator, we can see that the current bull market is still healthy.

In the chart above, you can even see that the S&P 500 index (black line) has declined in the last few days, but the advance-decline line (green line) is close to historical highs, indicating a buy signal.

In short, the advance-decline line is a simple yet effective tool that now reflects the stock market may continue to climb.

Despite various concerns about the possible end of this bull market (from inflation to record-high stock valuations), I personally believe that there are still opportunities to consider going long.

Also, considering the recent volatility, there are many good trading opportunities in the market right now.

Some of the world's leading blue chip companies are currently at a low point and are preparing for a rebound.

Analyst: Jeff Havenstein

Translated by: Samantha