It has been a great two weeks for the S&P 500. The market closed higher in each of the last 8 sessions, which lifted the index back above key support at 4150/4200, and back above the 50 day and 200 day moving averages. This move higher produced some short term ‘thrusty’ action, which means breadth (individual stock participation) went from really, really bad to really, really good over a few days. Specifically, we just got another Zweig thrust bullish signal, and as you can see in the chart below, this is a great sign for forward stock returns. Every time we have gotten this signal, stocks were higher over 6 and 12 months with average gains of 15% and 23% respectively. I like those odds.
Source: Ned Davis Research, Factset as of 11/3/2023
I also like the leadership I see from technology stocks. The technology sector, XLK ETF in the chart below, has been a leader for a very long time. Zooming in on the last two years it was a leader to the downside during the 2022 bear market and to upside in the new bull market that started in October 2022. So, when I see the sector break above its consolidation pattern (it’s been in a down channel since July marked by green lines) on the top chart while simultaneously moving to a new all-time high against the S&P 500 on the bottom chart, I have more confidence that a bottom in stocks is in place.
Source: Stockcharts.com as of 11/8/2023
Next, I want to see long term breadth improve. Based upon the two things just mentioned, it should happen, but I’ll be watching closely. This is a measure of stocks above the 200-day moving average. As of yesterday, the reading is 39%. That is worrisome as that means a lot of stocks are under their own 200-day average, and historically, that is bear market territory. The red boxes I placed on the charts below show the bear markets of 15/16, 2018, 2020, and 2022, and they all had consistent breadth measures below 50%. Will this be a narrow short term bull market at the end of the year, or will breadth expand on a longer-term basis and a much longer bull market be in store?
Source: Stockcharts.com as of 11/8/2023
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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