"Men, it has been well said, think in herds; it will be seen
that they go mad in herds, while they only recover their senses
slowly, one by one," said Charles MacKay in his classic book the
Madness of Crowds.
A closer examination of the U.S. stock market's (NasdaqGM:QQQ)
action shows how the herd is at it again and how this may indeed be
the weakest bull market by historical standards.
Although the Nasdaq Composite hit a 14-year high and the S&P
500 (NYSEARCA:VOO) hit an all-time high of 1,858 (along with
erasing year-to-date losses), this particular bull run isn't as
strong as the headlines make it seem.
One of the first signs of a frothy market is when the frenzy for
speculative stocks and initial public offerings (IPOs) becomes
insatiable. This was true during the dot com bust and it's true
In the biotech sector (NasdaqGIDS:IBB), less than a third of the
122 stocks within the Nasdaq Biotech Index are even making any
money, yet the index has surged 86% over the past year.
Stocks Don't Need to be Overvalued to Crash
The market's appetite for marijuana stocks along with profitless
companies like Zynga, FireEye, and Groupon is high too. The latter
have been among the leading performance gainers within the Russell
1000 (NYSEARCA:IWB), a large cap benchmark of U.S. stocks.
Although broad market yardsticks like the S&P 500 may be at
record highs, just 95 stocks hit new 52-week highs, which is a far
cry from the S&P 500's May 2013 peak when almost 200 companies
confirmed the top.
This same lack of confirmation pattern of fewer and fewer stocks
participating in the rally is an eerily similar pattern to the
pre-crash stock market of 2007. (See the article "
Higher Stock Prices on Declining Volume, a Major
" by my colleague Chad Karnes.)
Trading volume will either validate or invalidate the significance
of an index or security's performance. And the importance of
trading volume behind price moves cannot be conveniently minimized
Previous bull markets in the 1980s, 1990s, and 2000s all
occurred on brisk or rising trading volume, which is not the case
with the post-2008 bull.
As the accompanying chart shows, the S&P's (^GSPC) five-year
advance has been on the heels of below average trading volume.
What's the translation? Not only does this particular bull market
have less conviction compared to previous bulls, but you'll notice
how the above average trading volume during this particularly cycle
is closely aligned with stock market selling. Only a blind bull
would say none of this matters!
Finally, what about fear?
On multiple occasions, including today, the VIX
(ChicagoOptions:^VIX) - a common measure of stock market fear - has
not hit 52-week lows, even as the S&P 500 was making all-time
All of this illustrates the nonconformity of this particular
bull compared to its predecessors. Besides being a weaker bull, it
may also turn out to be the most dangerous ever.
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