Thursday, August 18, 2022
Market watchers, particularly market technicians, have had a lot to celebrate lately. The S&P 500 retraced more than half of its bear market decline earlier this year, which has historically confirmed the start of new bull markets. The Dow Jones Industrials Average broke above its 200-day moving average for the first time in four months. The utilities sector just became the first S&P 500 sector to break out to a new all-time high. And surging breadth has put more than 90% of stocks above their 50-day moving averages, as shown in this chart. This trigger has historically signaled transitions to new bull markets, as we discussed in this week’s Weekly Market Commentary here.
“We need to be careful about overreliance on just one or two technical signals, wrote LPL Chief Equity Strategist Jeffrey Buchbinder. “But it does seem like the path of least resistance for this market is higher and surging breadth certainly strengthens the bull case.”
As shown in the LPL Chart of the Day, stocks have historically done very well after reaching this technical breadth milestone. After this breadth measure exceeds 90%, after being below it for three months or more, the average gain over the next 3, 6, and 12 months has been 5.5%, 8.7%, and 18.3%, with gains over the next 12 months 93.8% of the time (15 out of 16). These breadth surges, which have taken place shortly after big downdrafts, tend to act as confirmation that the rebound is on firm footing and are usually followed by sustained market rallies.
We don’t know if history will repeat in this case. This study from Bespoke only goes back about 20 years so the sample size isn’t huge. And some of these rebounds were soon followed by corrections, such as the one in April-June 2012. Nonetheless, the stock market’s progress repairing the damage to the charts in the first half of the year is notable. We see further gains ahead as the market potentially prices in a less dire outlook and gets a lift from modest earnings gains, stable interest rates, and falling inflation.
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