One Of My Favorite Indicators Has Flashed 2 Bearish Divergences

To be honest with you, I’m at the point in my life and career where I no longer care if I’m “right” about what the market will or won’t do. And honestly I very rarely try and predict what it will do.

I’ll settle for being right more than I’m wrong. But make no mistake, at the end of the day, my chief concern is making money.

If I do make a prediction or believe something will happen, I no longer get entrenched in that belief. I can and will change my mind as I recognize what’s unfolding in the market, as opposed to what I thought should happen.

In two recent pieces (here and here), I’ve warned that a correction could be on the horizon. My reasoning was because one of the favorite market indicators that I follow flashed warning signs.

That indicator is what’s known as the AD Line. In short, it tells us the number of advancing stocks compared to the number of declining stocks.

I like to think of this as a peek under the hood of what’s happening in the market. Here’s how I described it back in late August:

“You see, when you are in an uptrend you want a lot of market participation, or many stocks that are also reaching new highs. This is a signal that the bull market is healthy, and confirms the bullish trend. However, if the AD Line fails to keep pace with the underlying index, this is a sign of weakness in the market, signaling a bearish divergence.”

What This Indicator Says Now

I’ve been making a point to keep checking in regularly on this indicator over the past few weeks, because it continues to show that there’s an underlying weakness in the market.

As you can see, the market reached a new high on September 2 (just days after I told readers I was still cautious). But the AD Line didn’t support that new high, flashing another bearish divergence instead.

Again, as I said in my previous two pieces, this indicator isn’t bulletproof. But it has a strong history of telling us when to be cautious.

Right now, the jury is still out on whether this was a false signal or not. The market has been pretty choppy since I first started updating readers on this.

Action To Take

My advice would be to put yourself in a good position to weather a correction if it does indeed come. Have a decent portion of your total portfolio in cash. Not so much that you miss out on the upside, but enough to be ready to strike if a correction does come.

I don’t know if a correction is looming. I can only go off what the market, sentiment, and the various indicators I follow are telling me.

Would it be great if the market corrected so I could stand on my soapbox and tell everyone I provided forewarning? Not really. I’m not interested in being “right.” I’m interested in making money, and perhaps more importantly, not losing money.

So, I’m remaining cautiously optimistic. I’m still making additions to the portfolios of both of my premium services, but I’m looking for opportunities to cut some dead weight in our portfolio. I’m also setting some hard stops on a couple of our trades in case the tide does turn.

If you’re more heavily invested in the market with little dry powder, think about raising some cash. You can do this either by pulling some profits or cutting losers, or a combination of both.

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