Why There Still Might Be Hope For One More Rally

The S&P 500 was down slightly last week, while the Nasdaq Composite continued to outperform the other major market averages after finishing up 0.60%. This is a positive development, as is the recent golden cross (the 50-day moving average crossing up through the 200-day moving average) that has formed on the S&P 500.

More importantly, it’s in line with what we would expect to see following a breadth thrust: a steady uptrend with shallow pullbacks. However, this recent strength has yet to translate to an improvement in the S&P 500’s long-term chart, with the index still below its 20-month moving average and requiring a monthly close above this average to move back to bullish (4220 S&P 500).

(Source: TC2000.com)

This close below that moving average is not a huge deal, but it would help to provide additional confirmation that we are indeed transitioning from a cyclical bear market (February 2022 to current) into a bull market. As past signals show, when the market has reclaimed its 20-month moving average and held it for two consecutive monthly closes, this has led 12-month plus with 20% plus gains. However, this comes with the exception of the March 1st 2019 signal which came up just short of twelve months, but did meet the 20% gain criteria.

In summary, this will be something for investors to watch for that would increase the probability of sustaining this recent uptrend and the probability of reaching the 4620 target from the breadth thrust registered on January 12th, 2023.

Most of the news that was made last week was from the January CPI reading coming in at 6.4% year-over-year, in line with Federal Reserve expectations so that we don’t see a drastic pivot from the slightly more dovish stance as of late.

Meanwhile, from an earnings standpoint, it was yet another encouraging week, with Restaurant Brands International (QSR), Bloomin Brands (BLMN), and Chef’s Warehouse (CHEF) posting strong results and beating or meeting forecasts. While this is a small sample of total S&P 500 company earnings, it’s a very important sample in that it provides a peek into the health of the consumer and their willingness to spend in discretionary areas.

Meanwhile, among higher-beta companies and tech, we saw another robust round of earnings here as well, with Roblox (RBLX), AirBnb (ABNB), Palantir (PLTR), Zillow (Z), and Cisco (CSCO) all up on earnings or holding onto their recent gains. This suggests the results were better than expectations or that they were priced for misses.

So, with better-than-expected numbers from discretionary names and outperformance from more speculative areas of the market, there’s reason to be cautiously optimistic on the market.

Adding fuel to the bull case, we saw a rare breadth thrust on January 12th that occurs when the advance/decline ratio closes above 1.98, which requires extreme buying pressure. This signal has resulted in positive returns 88% of the time over the next 12 months with a 16.8% average 12-month forward return, and no undercuts of a previous major low (3500 in this case) over the next six months. The 28th signal for this indicator could be the time that it fails, and anything is possible.

However, given the track record of this signal with no undercuts of major lows over the next six months, I remain optimistic that we’ll see 4400-4600 this year, though it may not occur in a straight line.