We are now 4 months into the rebound off of the Dec. 24, 2018 low, so it is a natural question to wonder if the uptrend is going to continue, or whether instead the major averages are going to stop here at the level of the prior highs. This week’s chart offers us some useful clues about which answer applies this time.
Here is the shortcut version: Gobs of breadth is a good thing.
Now here is the longer explanation: When the NYSE’s A-D Line is really strong for a long period, it produces really high readings for the McClellan Oscillator. That in turn pushes up the McClellan Summation Index, which changes each day by the value of the Oscillator, which means that more big positive Oscillator days will help to push up the Summation Index to a high level.
This week’s chart shows the Ratio-Adjusted Summation Index (RASI), which differs from the original classic version in that it factors out the changing numbers of issues traded over time. For a deeper explanation of the math, see this article.
The basic point which matters right now is that the ability of the RASI to climb up to a nice lofty value conveys an important message. It says that liquidity is plentiful, and that is a condition which is likely to continue for a while longer. A high RASI reading says that there is still more uptrend yet to come. There might be an ordinary, garden-variety correction to help restore equilibrium, but we are not at the end point for the uptrend.
Final price highs do not typically arrive with the RASI up above +500. The time to worry is when we are seeing prices moving to new all-time highs but the RASI is down below +500. This is especially important when there is a normal correction which takes the RASI down below +500, and then it fails to climb back above +500 on the ensuing rally. That is a big invitation to trouble.
But it is not at all what we are seeing now. The RASI is up at +1005 as of April 24, so it is a long way from decaying down to the point where it would be signaling a problematic loss of liquidity for the stock market. An ordinary correction can still appear at any time, and we have to accept that and be ready for it, but this is not the end of the uptrend. And that is a really nice piece of information to have the market give to us.