Broader is better when it comes to stock market rallies, and some analysts see technical signs that the gains could signal the end of the bear market in 2022, though it’s too early to say for sure.
“The risk that the recent advance is simply a bear market rally has not been eliminated. But … the technical improvement to this point is closer to a new cyclical bull market than a bear market,” Ed Clissold and Tan 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 involved in an up or down move.
Clissold and Nguyen noted that the rally that followed Federal Reserve Chairman Jerome Powell’s press conference on July 27 produced a pair of rare “broad push” signals: First, the percentage of stocks hitting 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-to-1 day for S&P 500 stocks earlier in July.
S&P 500
SPX,
by Tuesday’s close was up nearly 12% from its 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,
gathered about 450 points, or 1.4%.
Breadth 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 note. Clissold and Nguyen said they still offer useful signals, but require a “trust but verify” approach.
As for recent moves, they noted that the earlier rallies from the March and May bottoms each triggered two other broad push signals. “The fact that each of the three indicators that triggered in July did not appear earlier in 2022 is a change worth noting,” the analysts wrote.
Those earlier rallies, of course, turned out to be fakes. That means the constant 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—were higher than just the rally medians of the bear market, but also the new bull market medians.
Clissold and Nguyen said NDR’s “Big Mo Tape,” a measure of the percentage of sub-industries in uptrends, sits between the median of a bear rally and the median of a new bull market.
Overall, the current market setup follows the technical recovery seen following the downturns of 2009, 2011 and 2016, but is stronger than the start of several bull markets from the late 1980s to early 2000s on most measures of width, they said.
Big Mo Tape is one to watch for further technical confirmation, analysts said. A continued rally in the coming weeks will see it join other technical indicators as it is “clearly more consistent with a cyclical bull than a bear market rally,” they wrote.