Broader is better when it comes to the stock market rally, and some analysts see technical signs that gains may signal the end of the 2022 bear market, though it’s too early to say for sure.
“The risk that the recent advance is just a bear market rally has not gone away. But … the technical improvement to this point looks more like a new cyclical bull market than a bear market rally,” Ed Clissold and Thanh Nguyen of Ned Davis Research said in a note on Tuesday.
Technical analysts pay close attention to various measures of market range — or how many stocks are participating in an up or down move.
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-width” signals: First, the percentage of stocks that hit new 20-day highs rose above 55 % for the first time since June 2020? Second, the 10-day advance to 10-day decline ratio rose to 1.9 for the first time since 2021. The moves came after a 10:1 bull day for S&P 500 stocks earlier in July.
The S&P 500 SPX,
Tuesday’s close was nearly 12% off a June 16 low, after the large-cap benchmark confirmed a bear market decline in June. The S&P 500 rose 1.6% on Wednesday, while the Dow Jones Industrial Average DJIA,
rose around 450 points, or 1.4%.
Breadth push 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 triggered two other push signals each. “The fact that each of the three indices that spiked in July did not appear earlier in 2022 is a noteworthy change,” the analysts wrote.
Those earlier rallies, of course, turned out to be false. That means the lingering 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 average bear market rallies . but the new bull market also means.
Clissold and Nguyen said NDR’s “Big Mo Tape,” a measure of the percentage of sub-industries in uptrends, is between the bear-rally median and the new bullish average.
Overall, the current market setup follows the technical recovery seen after the lows in 2009, 2011 and 2016, but is stronger than the start of several bull markets from the late 1980s to the early 2000s for more measures, they said.
The Big Mo Tape is one to watch for additional technical confirmation, analysts said. A continued rise in the coming weeks would see it join other technical gauges to be “clearly more consistent with a cyclical bull than a bear market rally,” they wrote.