Stock Market Breadth Improves Notably
Just as the vitality and sustainability of any nation’s economy is tied to the condition of its middle class, the direction and momentum of the stock market is tied to the health of the average stock from which it is comprised. Market breadth is always a key indicator of the market’s general health, and many successful trading algorithms are built on breadth alone. What is market breadth telling us today, and what concerns remain?
For the 19th time since 1950, the market recently flashed a critical buy signal known as a ‘thrust’ signal. A thrust signal occurs when the 10-day total of advancing stocks divided by declining stocks exceeds 2, and in every one of the 18 occurring instances over 73 years, it has been a very bullish setup for the stock market.¹ While this is a strong indication of where stocks may be heading this year, enthusiasm for risk ought to be tempered with the following ongoing concerns:
Major bear markets, like the one in 2022, have historically not ended until the Fed began lowering interest rates, or until broad capitulation occurred in the stock market, or both, neither of which has yet occurred in the ongoing bear market.
Pullbacks of 5% to 8% have frequently preceded the advancement of prices following the thrust signal.²
The inverted yield curve is likely warning of an oncoming recession, which could bring an earnings recession, which would be punishing for stock prices.
Inflation is likely to remain well north of the Fed’s desired 2% range when it is forced to lower interest rates to battle the coming recession. This will likely fuel inflation again, especially with China re-opened for business. Continue to favor present streams of income.
Be sure to account for withdrawals before committing additional capital to equities.
When my climbing buddy and I are committed to a fair weather adventure, we carefully pack…and then wait for the weather window. Maintain a cash position as ‘dry powder’ for any remaining pullbacks in stock prices.
Maintain an adequate level of diversification, but continue to focus on prospering, and avoid suffering industries as the economy and financial markets adjust to new dynamics.
History rhymes, but it does not exactly repeat. We don’t need to see the Fed lower rates for stocks to change course, and with inflation easing, and the Fed indicating additional reductions in rate hikes, and knowing it would be extraordinarily rare for the stock market to decline in this post-mid-presidential election year, and knowing stock prices and valuations are significantly lower than 12-18 months ago, it is time to adjust our thinking and posture as investors. As Sir John Templeton wisely said, “never stay bearish for long”.
Think about it. Shaun
“He who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more’. His master said to him, ‘Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master’.” ~Matthew 25:20-21
1,2 Insights by Chaikin Analytics, “Stocks Just Triggered a Critical Buy Signal…..And a New Bull Phase Could Be Here”, January 17, 2023
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
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