All Clear?

The bad news is that after a rather rambunctious rally, the S&P 500 remains -8.9% from its all-time high. The good news is that after the -19.8% shellacking that ended on Christmas Eve, the stock market now starts the week well above its December lows and looking good.

To be sure, the recent rally has been impressive. In the last 17 trading sessions, the venerable S&P 500 has gained an eye-popping +13.6%. In the last 17 days, the index has finished in the red just 4 times and save the second trading day of 2019, the damage done during those losing sessions has been minimal. In the last 17 days, the major indices have "exited corrections," recouped their respective 50-day moving averages, and produced what are commonly referred to as "thrust" buy-signals. And in the last 17 days, the mood has turned from dismal to delight.

Suddenly, stocks don't go down anymore - ever. The trend is up. Momentum is strong. And anyone looking to add to their long exposure has been frustrated by the fact that there just aren't any "dips" to buy these days.

Thus, the major question on my mind as we start this holiday-shortened week is, are the bulls in the clear?

Long-time readers know that I refer to "thrust" buy-signals as a sign that the market's outlook is indeed "all clear" if one has a 6 to 12-month time horizon. In short, these indicators are designed to tell us when buying overwhelms selling over a 10-day period, which has historically been a bullish omen. As in, it's safe to buy again.

For example, when the ratio of 10-day advancing issues to declining issues exceeds 1.9 to 1, a "breadth thrust" buy signal is given. This particular indicator has been "right" (meaning the market has moved higher after the signal) 42 out of the 48 times since 1947 the signal has been given and would have produced an average gain of 10.5% in the ensuing 6 months and 16.5% a year after from the signal - both of which are about double the historical means of 4.26% and 8.79% respectively (source Ned Davis Research).

Oh, and this indicator flashed a fresh buy signal on January 9th.

Another such "thrust" indicator looks at the "oomph" behind market movements. Specifically, what is called a "deviation from trend" indicator looks for the market to move 2.25 standard deviations above its 225-day moving average - which is certainly no easy feat. According to the computers at Ned Davis Research, this is something that has only happened 15 times since 1980, with the most recent signal occurring on January 11, 2019.

Based on history, the signal would have been "right" 13 of the last 14 occurrences over the ensuing 6- and 12-month periods. The only losing signal 6-months after the signal was seen happened in 2002 and the only "wrong" signal a year on was back in 1987.

1 2 3 4
View single page >> |

Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

The opinions and forecasts ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.