Opinion: This breakout in stocks means the bull market isn't about to end – MarketWatch

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This bull market in U.S. stocks is aging. How much more life is left in it?

That is the key question. Here is an indicator with a good record to answer that question. Let’s explore with a chart.

The chart

Please click here for an annotated chart of the iShares Russell 2000 ETF IWM, +0.55% A similar conclusion can be drawn from a chart of the Russel 2000 Index RUT, +0.59% Please note the following from the chart:

• Small-cap stocks have broken out to a new all-time high.

• This is happening when major indexes such as the Dow Jones Industrial Average DJIA, -0.03%  and S&P 500 SPX, +0.13%  are below their highs.

• The Russell 2000 has made higher lows, as shown on the chart. This is a positive.

• The RSI (relative strength index) pattern shown on the chart supports the breakout.

• The breakout is on low volume. That is a negative.

• A shallow pullback from this level will not negate the positive implications of this breakout.

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End of the bull market

Near the end of the bull market, large-cap stocks perform much better than small-cap stocks. The reason is rather simple. In a bear market, large-cap stocks lose less money than small-cap stocks do. In a deep bear market, small-cap stocks that are darlings of the bull market can be decimated. For this reason, the “smart money” (professional investors) tends to pull out of small-caps when they see the bull market potentially ending.

Today the smart money is pouring money into small-cap stocks. The implication is that this bull market has further to go.

Caution

Investors should not rely on any one indicator or any one form of analysis. Investors are well-advised to rely on a sophisticated model that is comprehensive and has a proven track record over both bull and bear markets.

At The Arora Report we use the ZYX Global Multi Asset Allocation Model that has not only consistently beaten the market during the bull phase but also generated significant profits during the deep bear market of 2008 when most investors lost half of their money.

One reason this model has worked so well is that it is adaptive. It changes itself with market conditions. Please click here to learn how the model automatically changes itself. Markets are dynamic and change rapidly. Models that are fixed may work under some market conditions and then stop working as conditions change. For this reason investors should focus on adaptive models.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.