Five major indicators suggest that the market rally of 2019 – viewed with skepticism by many investors thus far – has switched from from bearish to bullish. Among the signs: the vast majority of stocks are trading above their 50-day moving averages, a rising number are hitting 52-week highs, several major market indexes are above their 200-day moving averages, and momentum has returned in force (see table below). “Momentum is a key component right now,” as Paul Brigandi, managing director and head of trading at ETF provider Direxion Investments told The Wall Street Journal. “A lot of people are jumping in to get on board,” he added.
5 Indicators This Bull Run Has Legs
- Over 80% of S&P 500 stocks above 50-day moving averages
- Rising number of S&P 500 equities hitting 52-week highs
- Many major U.S. market indexes above 200-day moving averages
- The most-watched index, the S&P 500, nears 200-day moving average
- Momentum investors are “jumping in,” propelling further gains
Source: The Wall Street Journal
Significance For Investors
The above indicators are used in technical analysis, which uses trends in trading activity to project the future direction of stock prices. A particularly dramatic move toward bullishness is captured in the fact that more than 80% of the stocks in the S&P 500 are now above their 50-day moving averages, or average prices during the previous 50 trading days. As of Dec. 24, 2018, only 1% of the S&P 500 stocks were above their 50-day moving averages, with the index then on a downtrend since reaching a record high earlier in the year.
With the major market indexes, comparisons between their current values and their 200-day moving averages are widely used by technical analysts to determine if stocks are on an uptrend or a downtrend going forward. As noted above, these trends have turned positive. Meanwhile, momentum investors work on the premise that recent price trends are likely to persist, and their recent buying activity is giving yet more upward impetus to the market.
During the trading week ending Feb. 8, 2019, an average of just under 23 S&P 500 companies per day set new 52-week highs based on closing prices, per Dow Jones Market Data cited by the Journal. By contrast, in the 14 trading days through Jan. 7, not a single S&P 500 company set a new 52-week closing high, the longest such stretch since May 2009.
Positive indicators related to the U.S. economy are “giving more fundamental-based investors faith coming back into the market, which is then driving what technical traders are seeing on their screens,” as Shawn Cruz, manager of trader product and business strategy at TD Ameritrade, told the Journal. The announcement by the Federal Reserve that it plans to be more restrained with future interest rate increases, combined with stability in the yield curve, are among the fundamental positives.
An inverted yield curve, with short-term rates higher than long-term rates, normally anticipates an upcoming recession. The likelihood of this scenario appears to be diminishing.
While the technical indicators discussed above are giving bullish signals, profit forecasts for 2019 are turning decidedly bearish. How long the market can continue to rise in the face of this increasingly negative fundamental factor is highly uncertain.