More technical indicators are emerging, pointing to the broad summer recovery in equities could be the start of something bigger.
Over the past few trading sessions, technical analysts have been confronted with a number of “market breadth” related indicators that could forecast further gains.
For starters, the number of S&P 500 stocks trading above their 50-day moving average hit 93% Friday — the highest level since June 2020, according to Dow Jones Market Data. On Monday, the number of S&P 500 stocks that closed above that level was 90.7%.
To see: Why the US stock rally looks more like a new bull market to these analysts than a bear bounce?
This is important because over the decades, when the number of S&P 500 stocks trading above their 50-day moving average has surpassed 90%, the market was almost always higher a year later — usually significantly.
After reaching this market-wide milestone, the S&P 500 is up more than 16% on average over the next 12 months. Short-term returns, however, were slightly more volatile.
“Every major market that has been low for the past 50 years has been characterized by crossing the 90% threshold,” said Todd Sohn, chief executive of technical strategy at Strategas.
“In the short term, your returns can be a bit of a tossup. But returns over the next six to 12 months are historically above average with very strong positive hit rates – something in the region of 80-90% of the time ,” he added.
In addition, market engineers have also taken note of the fact that the Invesco S&P 500 Equal Weight ETF RSP,
closed above the 200-day moving average for the first time since April on Friday – another sign that the stock market rally is encouragingly broad-based.
So-called “secondary” indicators such as market breadth are important to market engineers because they allow them to look “under the hood” and gain better insights into the quality of a particular market trend, said John Kosar, chief market strategist at Asbury Research.
“I’m focusing more on these internals now because if you’re just looking at the price, everything you’re doing is chasing you. I want to see the quality of these moves, not just how big they are,” Kosar said.
In a research note sent to his clients Monday, Kosar noted that a number of major stocks, exchange-traded funds and indices have all either crossed their 200-day moving average over the past few trading days or have come extremely close.
He cited this as another strong example of market breadth, but added that the rally in equities has become somewhat overworked – meaning there could be a pullback in the coming weeks.
Some of the names mentioned by Kosar are: Amazon.com Inc. AMZN,
the Dow Jones Industrial Average DJIA,
the Russell 2000 RUT,
the Philadelphia Stock Exchange Semiconductor Index SOX,
the SPDR Portfolio S&P 1500 Composite Stock-Market ETF SPTM,
and the Dow Jones Transportation Average DJT,
“All these big market leading stocks and the averages are testing the averages at the same time,” Kosar said, adding that this is another example of the magnitude of the market’s movement.
Of course, strong market breadth does not mean different parts of the market are achieving equally strong returns. As stocks hit their lows of the year in June, growth names like Amazon AMZN,
Google parent alphabet GOOGL,
and Netflix NFLX,
have outperformed — like the ARK Innovation ETF ARKK,
and cryptocurrency-linked stocks such as Coinbase Global Inc. COIN,
and Microstrategy Inc. MSTR,
Nevertheless, the growth and value factors have been sharply higher in the past month. And on Monday, the S&P 500 SPX,
and Dow Jones Industrial Average DJIA,
reached their highest closing level since May, as the Nasdaq Composite COMP,
booked its best slot since April.