There has been a lot of discussion as to what happens when the global short squeeze winds down to an end. Many are wondering if this move is real or even sustainable. The key to analyzing this question is to look at the market breadth of this huge move. The Advance Decline Index is the easiest and most accurate way to see what is really going on behind a move. The purpose of the index is to confirm that a move is real and sustainable by checking to see if the Advance Decline climbs as the rally climbs. If the Advance Decline makes higher highs as the stock market makes higher highs then it is a confirmation that the rally is both real and sustainable. If, however, the Advance Decline trends down as the market climbs it indicates market manipulation as the Indexes are being dragged higher by a small handful of mega stocks and ETFs while the vast number of stocks are selling leaving fewer and fewer actually participating in the market move.
Taking a look at the two charts above, the top chart is of the Vanguard Total Stock Market (ARCA:VTI) which is a good representation of the entire stock market and is a very good match for comparing to the US stocks Advance Decline Index (shown in the lower chart). We can see that the stock market has been climbing higher for the past three weeks while the Advance Decline has been down trending fast. A textbook non-confirmation of the rally. Historically, when this happens this is the ultimate buyer beware because a hard drop in the market may be imminent.
Will the market drop happen? In light of the all powerful tractor program that has been locked down on the market for the past week and a half and the manipulation that has gone on in the SPDR S&P 500 (ARCA:SPY) and PowerShares QQQ (NASDAQ:QQQ) shamelessly, I would not go short just yet as they continue to show that they have no problem bulldozing reason, logic, and technical analysis to achieve their desired results in the stock market.