Why the U.S. stock market rally is starting to look like a new bull market, these analysts say
Broader is better when it comes to the stock market rally and some analysts are seeing technical signs that the gains could signal the end of the 2022 bear market, although it is too early to say for sure.
“The risk that the recent advance may just be a bear market rally has not been eliminated. But…the technical improvement so far is more akin to a new cyclical bull market than a market rally bearish,” Ed Clissold and Thanh Nguyen of Ned Davis Research said in a Tuesday note.
Technical analysts pay close attention to various measures of market breadth – or the number of stocks participating in a rise or fall.
Clissold and Nguyen noted that the rally following Federal Reserve Chairman Jerome Powell’s press conference on July 27 produced a pair of rare “push in magnitude” signals: First, the percentage of stocks reaching new highs in 20 days exceeded 55% for the first time since June 2020; second, the ratio of 10-day advances to 10-day declines rose to 1.9 for the first time since 2021. The moves came after a 10:1 bullish day for S&P 500 stocks earlier in July.
The S&P 500 SPX,
through Tuesday’s close was up nearly 12% from its June 16 low after the large-cap benchmark confirmed a drop in a bear market in June. The S&P 500 was up 1.6% on Wednesday, while the Dow Jones Industrial Average DJIA,
rallied around 450 points, or 1.4%.
Range indicators are designed to be rare, but the growing role of exchange-traded funds, algorithmic trading and other factors have increased their frequency over the past 13 years, analysts noted. Clissold and Nguyen said they still offer useful signals but require a “trust but verify” approach.
As for the latest moves, they noted that earlier rallies from the March and May lows each triggered two more magnitude push signals. “The fact that each of the three indicators that triggered in July did not trigger earlier in 2022 is a noteworthy change,” the analysts wrote.
These previous gatherings, of course, turned out to be fakes. That means the ongoing question for investors is whether the recent gains are just another in a series of failed rallies in a cyclical bear market or the early stages of a new bull market, analysts acknowledged.
They found that three indicators – the percentage of stocks at new 21-day highs, the percentage of stocks at new 63-day highs, and the percentage of stocks above their 50-day moving averages, are higher than not only the bear market rally medians, but the new bull market medians as well.
Clissold and Nguyen said NDR’s “Big Mo Tape,” a measure of the percentage of sub-industries in uptrends, sits between the bearish rally median and the new bullmarket median.
Overall, the current market setup lags the technical improvement seen after the lows of 2009, 2011, and 2016, but is stronger than the start of several bull markets from the late 1980s to early 1980s. 2000s for most magnitude measures, they said.
The Big Mo Tape is the one to watch for further technical confirmation, analysts said. A continued rise in the coming weeks would see it join other technical indicators in being “clearly more consistent with a cyclical bullish than a bearish rally,” they wrote.