More on stock market indexes’ advance-decline lines: the healthy and the sick

 

 - by New Deal democrat

I am currently on vacation, and as the shutdown continues with no end in sight, the only sources of economic data are from the Fed and its regional banks, the States (unemployment claims and sporadic updates on tax withholding), and private sources. 

In other words, I might play hooky several days a week, so don’t be surprised.

There is one thing worth following up on today. That’s the health of the stock markets. Aside from the fact that the stock market is a short leading indicator, it is particularly important at the moment because of the “wealth effect” on consumers who have watched their paper portfolios increase sharply in value over the past 6 months.

Last week I pointed out that one bellwether for the health of the markets was the advance-decline line; that is, the number of companies in the indexes that are participating in an advance or decline. In particular, I pointed out that the advance-decline line had warned of unhealthy markets in advance of both the 2000-01 dotcom bubble collapse and the Great Recession. 

Well, we’ve had some interesting action over the past week, with the return of China Tariff-palooza and its almost immediate walk back (but not before one or more people with apparent inside information made a killing). And this morning I read that several over-levered players adjacent to the auto industry went bankrupt last month.

So let’s take a look at several different indexes, updated through yesterday.

Last week I showed the S&P 500 advance-decline line. As of yesterday, it continued to be generally neutral, with almost no advance compared with 3 months ago, but no downtrend, and indeed several new highs earlier this month:

But the NYSE a-d line has not nearly been so healthy:

It is no better at present than it was almost 3 months ago, and has been in a clear downtrend since early September.

Even worse is the small cap Russel 2000 a-d line:

It peaked at the end of last year, and although it rebounded after April, it has had a rrenewed decline since a secondary peak in August.

On the other hand, the Nasdaq a-d line continues to be positive:

Like the S&P 500 a-d line,  it made new highs earlier this month, and even the pullback in the last few days did not take it down it its August or September lows.

This confirms my general view of the economy. In the broadest terms, it is pretty unhealthy. But in the specific areas where there has been a Boom (or, maybe, Bubble), it has not cracked at all. I’ll continue to watch to see if that happens; and if it does, my suspicion is, “look out below!”

Tabulations of state level reports indicates 228,000 initial claims, 1.938 million continuing claims last week

 

 - by New Deal democrat

Among the economic data that is not being reported due to the federal government shutdown are initial and continuing jobless claims. Which, as I pointed out last week, is interesting because they were reported during the lengthy 2013 shutdown and for at least part of the 2018-19 shutdown.

But both sets of claims are simply tabulations of all the claims made at the State levels (plus DC, Puerto Rico, and the Virgin Islands), to which a seasonal adjustment is made. This means that we can reconstruct the YoY% changes in the data from the various jurisdictions’ reports; as well as provide a reasonable estimate of what the seasonably adjusted numbers would be.

Tabulating the 53 jurisdications’ reports, for the week ending October 4, unadjusted initial claims totaled 207,794 vs. 236,179 in 2024, which is -12.0% less. 

Last year this week the seasonal multiplier was *1.0966:

Applying it gives us an estimated seasonally adjusted number of 228,000, a 4,000 increase from one week ago. 

Adding it to the three previous weeks of data we arrive at a four week moving average of 225,500, which is 6,750 less than one year ago, or -3.1% lower. 

There is an important caveat about last year in that these were affected by hurricane related layoffs, particularly in Florida and North Carolina. 

Next, continuing claims with the typical one week delay, i.e., for the week ending September 27, totaled 1,683,327 vs. 1,614,324 last year, or 4.3% higher.

The seasonal adjustment for the applicable week last year was *1.510:

Applying it gives us an estimate of 1.938 million continuing claims, or +19,000 higher than one week ago.

Absent hurricane distortions, this continues the general neutral trend of initial and continuing claims, forecasting a weak but not contracting economy in the next several months. I will continue to estimate this data for the duration of the shutdown.

Weekly Indicators for October 6 - 10 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

More roiling of the waters in commodities, in between signs of economic weakness and another re-ignition of the China trade wars. Meanwhile the Treasury Department, for no apparent valid reason, but only out of spite, has taken its “Daily Treasury Statement,” which enables us to measure tax withholding and tariff revenues, offline. And not just new updates, but all of the already published data.

As usual, clicking through and reading will bring you up to the virtual moment as to the state of the data, and reward me a little bit for obtaining and organizing it for you.

The “Big Picture” nowcast and forecast

 

 - by New Deal democrat

We are well into our data blackout, as no federal economic data whatsoever was released this week. Even sites that functioned in previous shutdowns, such as the Treasury Department’s “Daily Treasury Statement,” have been taken offline. This is simply not the way a functioning country works.

So let me conclude this week by offering the proverbial “30,000 foot view” of the economy, together with some links and graphs to relevant privately sourced data that is partially filling in some of the gaps.

The Big Picture nowcast and forecast are dominated by two different events.

The nowcast is that the economy is currently sharply bifurcated into an AI-related part and the rest. The AI-related part of the economy is booming. Corporate profits in the 3rd quarter are set to make another record, powered by the “magnificent 7” tech companies (Note: many of the below graphs are sourced from Carl Quintanilla’s excellent Bluesky feed. Several are also due to the extremely helpful “Alternative Data” graph pack from Apollo Investments, see https://www.apolloacademy.com/wp-content/uploads/2025/10/AlternativeData100525.pdf ):

Data centers are still being built at a fast pace, creating more demand for energy, and also (as I wrote yesterday) creating a “wealth effect” that is fueling consumer spending by the upper echelons of owners of stocks, as shown in this graph by B of A:

But the rest of the economy probably began a recession several months ago, with real personal income and jobs stagnant or even having begun to decline. The Bank of America published its proprietary employment indicators for September several days ago, and here are the important graphs:

Employment gains hovering just above 0 and the unemployment rate rising is a classic signal at the beginning of recessions.

There are also reports that bankruptcies have been increasing:

And consumers are falling behind on important installment loans such as for motor vehicles:

At least some of this, by the way, may be due to the resumption of the full requirements of repayment of crippling student loans, which may not be discharged in bankruptcy.

So why aren’t I on “Recession Watch” already? Because the size of the AI Boom is so big that for the moment at least it is more than counterbalancing the malaise in the rest of the economy.

The Big PIcture forecast, generally for the rest of the T—-p Administration, is gloomy. That’s because the entire US fiscal and economic policy is being run as a gargantuan mafia-style “bust-out,” or what Darin Acemoglu and James Robinson called “extractive economies” in their book “Why Nations Fail.” In extractive economies, an elite group of cronies around the ruler uses political and economic power to enrich themselves. Part of this paradigm is the mafia-style shakedown: “got a nice company/product/industry there; be a shame if something happened to it.” 

T—-p’s entire economic “policy” has been built around this. Want to export to the US? Wet my beak. Want your merger to go through? Wet my beak. Want your State’s biggest industry (agriculture, vehicle production, tourism) to stay intact? Wet my beak:

We’re even seeing the government directly invest in the stocks of companies; viz., Intel. Even the $20 Billion bailout of Argentina, unsurprisingly, looks like it was mainly to rescue the investment portfolios of several Billionaire T—-p cronies.

And of course the “Big Beautiful Budget Bill” amounts to a massive upward transfer of wealth that will so explode deficits in the coming decade that it will leave little if any room for stimulative policies to counteract the next downturn.

Extractive economies grow anemically or even contract, because it is simply not worth it to innovate when the ruler and his clique will muscle in.

Exactly how the US economy will degenerate during the next 3 years (or whatever the duration of T—-p’s time in office) is impossible to know or predict. But it is a virtual certainty that it will degenerate. And in the meantime we are flying blind, because the flow of reliable statistical data has also been mainly shut off.

The advance-decline line and the (maybe) AI-fueled consumer spending bubble

 

 - by New Deal democrat

I rarely comment on the financial markets directly, since my focus in on the economy and how it impacts ordinary working and middle class Americans, especially in the near future. But in some cases, the financial markets themselves play an important role in that picture. And this is one of those times.

Specifically, in terms of what is called the “wealth effect.” It means that when people’s wealth increases, even if it only on paper, they tend to spend some of that gain. According to Ned Davis research, it averages about 40% of the amount of the gain.

Well, since the post-“Liberation Day” April bottom, the stock market as measured by the S&P 500 has increased almost 35%. Meaning, for example, that a household that held $100,000 in that index in April has seen it grow by $35,000. A wealthier household that held $1 million, has gained $350,000. And so on.

As I have pointed out a number of times in the past several months, it is strong consumer spending that is keeping the economy going forward, despite recessionary signs elsewhere.

But how robust, or fragile, are those gains? One of the best historical measures I have found to be the “advance-decline line.” This subtracts the number of stocks which have lost value on any given day from the number which have gained. For example, if there are 1000 stocks in a bucket, and 550 have advanced and 450 declined, then the advance-decline line increases by 100. If the advance-decline line shows that the broad mass of stocks are participating in an advance, that is a good sign, because it suggests that many sectors are benefitting. But if it is narrow, or worse even declining, while the market index increases, that means that only a few stocks in a narrow sector or group of sectors are participating, suggesting trouble for the markets, and the economy, ahead.

There are two very good examples of the advance-decline line giving such a signal.

First, here is the late 2006-2007 time frame just before the onset of the Great Recession. The top graphic is the NYSE, the second is the advance-decline line for the S&P, and the bottom is for the S&P 500:

Note that even as stocks broke out to new highs at mid year, and again to their early autumn peak, the advance-decline line retreated in spring, and was even lower by autumn. This told us that the economy was resting on a narrow slice of sectors.

An even more breathtaking example is that of the Dotcom bubble of 1999-2000:

Here the advance-decline lines for the NYSE and S&P 500 declined sharply throughout the latter part of 1999 into 2000, even as the index raced ahead by almost 50%! This was a telltale sign, indicating that outside of the bubble economic prospects were not good at all.

So how has the advance-decline line been behaving this year? Here’s the answer for the S&P 500:

As indicated above, since the bottom in early April, stocks have increased by almost 35%. The advance-decline line participated fully in the springtime advance to mid-year.

But since early July, while the S&P 500 has increased almost another 10%, although it has not declined the advance-decline line has only increased by about 1%.

This is “yellow flag” territory. Slightly more stocks than not have been participating in the advance. But compared with the amount of the advance, it is quite narrow.

I would need the advance-decline line to actually turn down before it would signal a “red flag” for me.

But here is the important thing to keep in mind. If the AI-focused stock market is in a bubble - which is almost impossible to know while you are experiencing it - then whenever it pops, stock valuations are likely to plunge all the way back to their pre-bubble levels (and maybe overcompensate to the downside).

Which in turn brings us to the opposite of the “wealth effect.” Psychologists have estimated that this “negative” wealth effect is about twice as potent as the “positive” one. In layperson’s terms, people *really* hate to lose money. When that happens, they pull in their horns much more dramatically than when they spend some of their paper gains.

The conclusion here is that it doesn’t look like the turn is imminent. But if and when the turn comes, if other economic circumstances are close to what they are now, the contraction could be rather sudden and intense.