Cautious Confirmation

The market is on fire right now.

Last week I highlighted the wave of confirmation across sectors and breadth.

Now we even have small caps and micro caps all showing up to the party.

But as always in markets: by the time you achieve perfection, you’ve often already made the bulk of the move.

So, as we continue making new highs and climbing the proverbial wall of worry… ironically, my own worry grows.

Because sometimes the most dangerous time for bulls is when there’s no visible bear case.

So… let’s play devil’s advocate and unpack why a little caution MIGHT be smart here.

I call it my “extended” chart.

It plots the % of S&P 500 stocks trading above their 20-day moving average, layered alongside price.

It’s simple. Clean. And incredibly useful.

No, it doesn’t predict tops or bottoms—but it functions beautifully as an expectation monitor. Especially when emotions (or FOMO) start to take over, it helps put the current move in proper context.

Today, 80% of S&P 500 stocks are above their 20-day moving average.

That tells us we’re in an environment where most stocks are participating—and that we’re starting to push into more extended short-term territory.

But like most things in markets, there’s nuance.

1.) Trend Confirmation

This kind of broad participation confirms strength.

We’re not just seeing megacaps dragging the index higher—most stocks are working.

That’s the kind of internal leadership bulls want to see.

Historically, when 70–80% of stocks are above their 20DMA and hold those levels, the market tends to be in a strong trending phase.

Think: 2013, 2017, 2021.

This is a healthy market under the surface.

2.) Short-Term Exhaustion Risk

That said….readings above 80% are rare, and they often mark points of short-term exhaustion.

Backtested data shows that when this indicator spikes quickly, especially after a rally, the market often pauses or pulls back. Not reverses. Just breathes.

The chart shows this well: every time we hit that 80% zone, it’s historically been a good moment to calm the emotions, not chase the highs.

I remain bullish.

This rally has breadth, it has leadership, and it has confirmation.

But I’m also aware that sometimes, the absence of a bear case becomes the bear case.

While sentiment is tricky to measure, when 80% of stocks are already above their short-term average, the market doesn’t need a reason to pull back.

It just needs an excuse.

In the short term, this setup is both a green light and a yellow one.

I’m still long. Still participating.

But I also understand that a pullback here wouldn’t be a breakdown.

It would be an opportunity.

And unless the data changes, any dip would be one I’m looking to buy.

Cheers,

Larry Thompson, CMT CPA

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