May 27, 2020

What Happened

The rebound in stocks continues to impress. Recent market gains have been aided by optimism surrounding the reopening of the economy and the potential for a vaccine.

On Tuesday, a price-based measure of buying pressure reached an important threshold—the percentage of stocks in the S&P 500 trading above their 50-day moving average price breached 90% for only the 16th time since 1990*.

Looking at prior periods where the 90% threshold was reached, the S&P 500 was higher one year later in 14 of 15 instances, with an average gain of 16%. As we covered in a 2019 Market Perspective, we last saw this signal in February 2019.

What also stands out with the current signal is that the market went from extreme selling (less than 10% of stocks above their 50-day moving average) to extreme buying (90% or more of stocks above their 50-day moving average) in only a few months. This has occurred only six other times since 1990, always following important market bottoms. Each time stocks were higher a year later with above-average gains. 

Occurrences Where Market Went from Broad-Based Selling to Broad-Based Buying

1) November 1998: Initial leg higher after stocks bottomed following the

Russian ruble crisis, the collapse of the Long-Term Capital Management hedge fund, and a 19% stock market correction.

2) May 2003: Initial leg higher after stocks bottomed in March 2003 following the bursting of the technology bubble.

3) May 2009: Initial leg higher after stocks bottomed in March 2009 following the financial crisis.

4) October 2011: Initial leg higher after US debt downgraded, rolling European debt crisis, and a 19% stock market correction.

5) March 2016: Initial leg higher after stocks rebounded from the worst start to a year in history on global growth and China concerns.

6) February 2019: Initial leg higher after stocks rebounded following the December 2018 selloff on Federal Reserve tightening and tariff concerns.

Bottom Line

We view the broadening of the rally beyond just a few market leaders as a positive longer-term omen. Similar readings in the past have tended to occur following important market bottoms. While this is only one factor, and we still expect periodic pullbacks, this indicator supports our overall equity bias.

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CN2020-1163 EXP12-2020