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Well, I have to say that the current rising market has not felt orgasmically great for many participants. It was a very challenging V bottom in late December and those hoping for a substantial pullback to enter an uptrend have watched the market move higher in January, then February, then March, and now early in April. I speak with a number of traders, and I have to say I observe little euphoria. If anything, the sense is frustration at not having participated in the rally.
So can this really continue? Can the market go higher still?
My aim is to examine the evidence in as open-minded a manner as possible. I want to be open to weakness and strength, bear and bull possibilities. And, perhaps most of all, I want to openly acknowledge when my research shows little directional edge.
Back in September, we were seeing growing weakness across a number of sectors and a cumulative uptick/downtick line that could not make new highs despite fresh highs in the large cap indexes. That led me to question the upside. Conversely, in early March, I took a look at what happens after a year starts with consecutive strong months and found a surprisingly bullish outlook. A couple of weeks later, my look at that uptick/downtick line reinforced the upside view.
Well, that line has continued to make new highs. There are no signs of divergence as occurred at the 2018 peak. Moreover, we’re not seeing any expansion of short-term new lows, as happened late last year. Indeed, fresh one-month new lows across all exchanges (as reported by Barchart.com) have been quite low, which historically has led to bullish returns on a next 20+ day basis. Usually, if there is going to be significant weakness, we see some sectors lead the way down, as housing did in 2007. That weakness just isn’t present at this time.
I noticed an interesting event at the Friday close. Over 80% of all SPX stocks closed above their 3, 5, 10, 20, 50, and 100-day moving averages. (Data from the excellent IndexIndicators.com site). That is very broad strength. Going back to 2006, we’ve only seen 23 similar occurrences–and none since 2013! Many of those occurrences were seen in 2009 and 2010 and then again in 2012 and 2013 during protracted rises following market weakness. Indeed, if we examine those 23 occurrences over the next 20 and 50 days, we find 17 occasions up and 6 down for both time frames. The average 20-day gain was about 1.5%.
What this says to me is that we’re seeing significant upside momentum in stocks. Historically, such momentum has led the market higher, though not necessarily at the same rate previously seen. The main takeaway is that we can’t conclude that we’re heading lower simply because we’re “overbought”. Whether we think the valuations are justified or not, whether we like macroeconomic forecasts or not, equities have found meaningful demand. Perhaps that’s not so surprising in a world of low interest rates and tepid growth: U.S. stocks may offer some of the few havens for yield and growth. It may also be the case that the stock market, which has been kindly disposed to the current U.S. administration ever since the 2016 election, could display similar behavior should odds of re-election increase.
In any case, we’re seeing broad strength and few signs of weakness. A normal correction, given low levels of volatility and volume and the fact that stocks making new 52-week highs are not expanding, is clearly a possibility. If the mood of participants that I speak with is indicative of a more general mood, any such pullback may find interest from frustrated traders late to the party.