Bullish Market Breadth: Better Late to the Party Than Not Show Up at All

The S&P 500 Index continues to participate in a rally off its February 11, 2016, low price at 1810; it has moved approximately 15% higher and is currently within 1% of its all-time high level at 2134. The interesting part is that even with the index potentially moving into new all-time highs, market breadth (as measured by the percent of S&P 500 members with new 52-week highs) on balance remains lackluster, and has not yet fully supported the recent bullish trend.

Are lackluster readings in this market breadth indicator necessarily bad for the equity markets? No, not always; sometimes it just may take some additional time to move this metric higher into bullish territory. This metric may just be a little bit late to the party.

Looking at historical weekly data going back to 1994, for a cyclical bull market, the average percent of S&P 500 members with new 52-week highs is 6.1%; and for a cyclical bear market the average is 1.85% [Figure 1]. During the latest rally off the February 11 bottom, the average percent of S&P 500 members with new 52-week highs has been 4.4%, which is above the average value of a cyclical bear market; however, it’s below the average value of a cyclical bull market.

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One bright spot is that over the past three weeks, the average percent of S&P 500 members with new 52-week highs is increasing, currently at 7.4%, which may potentially be the beginning of this breadth indicator moving into a bullish trend zone [Figure 2].

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Looking once again at historical data, when the three-week average of the percent of S&P 500 members with new 52-week highs is above 6%, subsequent returns on the index tend to be bullish [Figure 3]. Going back to 1990, there were 57 times this happened. Three months later, the S&P 500 was higher 38 times (67% batting average) with an average return of 1.13% and a median return of 2.4%. Going out six months, the returns are higher 46 times (80% batting average) with an average return of 4.2% and a median return of 5.1%. Looking out over the longer term at 12 months, the returns were higher 51 times (89% batting average) with an average return of 9.9% and a median return of 9.7%.

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A three-week average value of the percent of S&P 500 members with new 52-week highs over 6% has historically led to a continued bullish outcome for equities over the next 3–12 months. We do continue to expect a volatile second half of the year for equities, but with a high probability for new highs, along with mid-single-digit gains.* If the percent of S&P 500 members with new 52-week highs can be sustained above the 6% threshold, then it increases the likelihood that the rally in equities continues and supports a bullish price trend. Seeing an increased number of new 52-week highs on the S&P 500 Index is really the next (and well-needed) bullish catalyst to move equities higher. In this case, it is better to be late to the party, than not show up at all.

IMPORTANT DISCLOSURES

*Historically since WWII, the average annual gain on stocks has been 7-9%. Thus, our forecast is roughly in-line with average stock market growth. We forecast a mid-single digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid-to-high-single-digit earnings gains, and a largely stable price-to-earnings ratio. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

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