October 9, 2020
The weight of the evidence in our work continues to suggest that the stock market is in the midst of a multi-year bull market, consistent with the early stages of an economic recovery. Economic expansions since WWII have averaged longer than five years, and stocks have risen 85% of the time when the economy is growing. Adding further support to our thesis—and our recent increase to equities—is a market-based indicator that measures buying pressure. It reached a threshold that has historically been associated with a very high probability of positive 12-month stock returns.

Indeed, after the deepest pullback of this bull market during September, stocks have rebounded sharply. Specifically, over the 10-day period through Thursday, the number of S&P 500 stocks advancing outpaced those declining by more than a 2-to-1 margin for only the 29th time since 1990 (based on first signal and removing clusters). This is known in technical jargon as a “buying thrust.” Following past signals, the S&P 500 was higher 12-months later 96% of the time with an average gain of 13% (see table at end of commentary for details).

This indicator provides evidence of an expansion in market participation. As opposed to just one area leading the way, such as a few select technology stocks, many stocks are now rising. Indeed, the transportation group, homebuilders and semiconductors just reached all-time highs, while materials are less than 1% from doing the same. We are also starting to see better activity from some of the lagging sectors, such as financials, utilities and small caps. (Our current recommended sector overweights are industrials, materials, consumer discretionary and technology.)

Notably, these signals have often occurred when the market was reasserting its uptrend following a pullback. For example, this indicator was triggered in early 2016 after stocks got off to the worst yearly start in history based on global growth and China concerns. The signal was triggered again in July 2016 after the Brexit shock, and in January 2019 after a sharp selloff. These three signals were followed by strong returns.

That said, the latest two signals were followed by negative one-month S&P 500 returns. Following the September 9, 2019 trigger, stocks rose slightly before succumbing to a short-term 4% pullback. The most recent signal triggered on June 5th, which coincided closely with a short-term market peak and a subsequent pullback of about 6%. In both cases, however, stocks then rebounded and were solidly positive on a three-month basis from the initial signal.

Bottom Line

It is a sign of strength when the market is advancing with the force of the entire army, not just a few generals. While no indicator is infallible and should not be looked at in a vacuum, we view this latest technical buy signal as a positive. Notably, this indicator’s 12-month positive return accuracy of 96% matches what has historically occurred following five-month S&P 500 winning streaks, which we discussed at the end of August.

Although the noise-to-news ratio, and with it market volatility, is likely to remain elevated with the election less than a month away, this buying thrust signal adds support to our view that the path of least resistance for stocks over the next 12 months remains higher. Accordingly, bull market rules apply—until the evidence shifts, we recommend investors stick with the primary uptrend and view pullbacks as opportunities.

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