As long as anyone can remember, the U.S. stock market has made higher highs after declining slightly.
That’s a mark of this bull market. The ability of the market to press higher and attain new all-time highs has been consistent, so investors expect it.
This time is not different. But something has changed, and we need to note that.
The stock market, measured by the Dow Jones Industrial Average DJIA, -1.16% and S&P 500 Index SPX, -1.27% declined about 10% starting at the end of January. And now stocks are rebounding. But they have not yet exceeded the record levels of January.
It’s important to remember that we are in the process of a major transition in investor sentiment. Eventually the market won’t make higher highs. When that happens, that would be a sure sign that sentiment has shifted. So far the market has gone from outright bullish to neutral, not negative.
Some of the first signals were volatility spikes in the Dow, S&P 500, tech-stock bellwether PowerShares QQQ QQQ, -1.24% and small-cap bellwether Russell 2000 Index RUT, -1.47%
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If the market fails to make a higher high and, instead, falls, it would make a lower high, and set the stage for lower lows. In fact, stocks were in lower-high territory Tuesday.
The odds that the market fails to make a record high this time around has increased significantly as a result. This is a great time to manage risk, or use strategies that can work even if the market drops.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily.