Over the weekend, we penned a piece that was titled Don’t Let Barron’s Scare You. The point to the article was that it is very easy to read a bunch of expert opinions (and make no mistake about it; the folks interviewed by Barron’s are indeed seasoned experts) and become more than a little nervous about the economy, the market, and the positions in your portfolio. However, investors should understand that there are always people espousing negative views, even during the most fervent bull market environments. And while the doom-and-gloomers may have a point at times, we believe it is better to have a plan for your portfolio and to stick to it.
If you’ve read any of our Technical Talk reports recently, you know that we’ve been suggesting that while the rally is getting long in the tooth and that a correction could begin at any time, we believe it is best to give the bulls the benefit of the doubt right now. And the purpose of this little missive is to provide our readers with some statistical backup for our glass-is-at-least-half-full attitude.
With stocks having moved straight up since the beginning of November, we understand that a little trepidation may be setting in. However, we’d like to present a couple very good reasons why investors may want to continue to “lean long” for a while longer yet.
Always Trust the Thrust: We’ve written several articles on Breadth Surge Buy Signals over the past year. The most recent of which was penned in early August. If you will recall, the point to these indicators is that when the breadth of the market becomes overwhelmingly positive over a short period of time (something we call a breadth surge or thrust), such an event usually has positive implications for the market over the next 3, 6, 9, and 12 months.
So, one very good reason to give our heroes in horns the benefit of the doubt right about now is that the most recent breadth thrust buy signal was triggered on September 16, 2009. Why is this significant? In short, because since 1947, the computers at Ned Davis Research tell us that stocks have been higher one year after this type of buy signal 28 out of the 29 occurrences.
The one losing signal came in early 1987 and was ruined by the now famous “Crash of ‘87” that occurred nine months and six days after the signal was given. However, it should be noted that stocks were indeed significantly higher 3, 6, and 9 months after the signal.
Of the 28 buy signals that were correct over the last 60+ years, history shows that the average gain for the S&P 500 one year after the breadth surge buy signal has been +17.5%. Sure there were some weak years, but 21 of the 28 years saw double digit gains averaging +22.8%.
What does this tell us about the current market? Let’s put a pencil to these numbers and see what we come up with. The S&P closed on September 16th at 1068.76. This means that if history holds true, the S&P should be 17.5% higher by this September, which would put the index at 1255.79. Next, since the S&P closed Tuesday at1150.23, this means that we could expect to see a further gain of +9.18% from here. Thus, the good news is we’ve only seen about one-half of the average gain from this type of signal.
New Highs Are a Good Thing: We’ve recently learned that the percentage of New Highs on the New York Stock Exchange hit the highest point of this cycle on January 8th at 26.7%. In light of the fact that this number doesn’t sound all that impressive, the natural question is, why should I care?
Digging into the computer database of Ned Davis Research again, we find that bull markets just don’t abruptly end after a peak in New Highs has been reached. In fact, since 1967, the median lead time between the peak in New Highs and the top of bull markets has been a little more than seven months.
So, with powerful buy signals telling us that stocks could certainly run higher and the peak in New Highs telling us that the next bear could be several months away, we will try to remember to give the bulls the benefit of the doubt when things get sketchy.
However, this is not to say that
