The Market Taught Us One Thing This Year: Anything Is Possible
The Stock market made a large-scale comeback this month. In the last few days, we saw a small decline, but overall, the stock market has come back with a rise in numbers. Previously, tech companies led the market recovery. Now, technical analysis indicates that the market has more room for growth in the coming months.
High-tech stocks have helped the stock market recoup most of its decline this year, but now more stocks carry the burden of moving the market. This month several market benchmarks set new highs, signaling that the market’s comeback is broad-based. In previous weeks, Large-Cap Technologies shares carried the market. Finally, after short periods of rotation in the lead, a broader group of stocks is rising simultaneously.
A series of shares, from Clorox’s stock to Eli Lilly and Danaher, recorded new highs last week, raising the S&P 500 index by 1.9% and reducing its annual decline to 4.1%. For investors who have found themselves in quite a few frenzied trading days, this is an honorable result given the COVID-19 epidemic and the uncertainty created by it. It may be that the market realizes we need to live with COVID-19.
For those who are analyzing the stock market, things are looking far more optimistic: Technical measurements indicate that stocks have more leeway in the coming months. Market volume signals have expanded recently. Earlier this month, the indicators have been bullish: More than 97% of the 500 S&P stock has traded above its last 50-day moving average – the measurement that analysts are tracking to get an idea of momentum and market scope. According to Dow Jones Market Data, it was the highest share since June 2010, and almost twice the stock traded at such levels in early May.
It’s amazing. Sentiment has changed so significantly in a short period. Investors this week will monitor consumer spending data and new home sales to measure economic recovery.
Technical analysts say there are more signs of market breadth. The NYSE popular cumulative indicator that tracks the number of stocks that go down each day has recently risen to its highest level for at least two years, according to data starting in June 2018. The 500-year-old S&P 500-month progress line is nearing its February high, according to Dow Jones data.
At the same time, the 500 S&P index gives equal weight to the large and small stocks and bypasses the general index formulated by the market value of the large companies. The CPI rose 2.2% this month, and 22% in the second quarter, against the regular CPI of 1.8% and 20%, respectively.
“Historical Stock Buying Environments”
Investors who monitor market size cite these measurements as proof of stock market momentum and signals that there will be sharper rises in the future. They agree that a larger group of shares needs to participate in the growth if a particular segment is fragmented.
History shows that when more than 90% of 500 S&P shares exceed their 50-day trading average, a rare occurrence signals a period of upward growth. Despite gloomy headlines, we see the signs that in 6-12 months from now, stock prices can be significantly higher. The historic buying environments, like the one we’re in the middle of, tend to occur at the beginning of bull markets.
Such over-performance, of course, only occurs after violent realization. Previously, more than 90% of the shares traded above the 50-day moving average were in February 2019 and before spring 2016. On both occasions, the S&P 500 index saw double-digit increases, a year after the trading-day average crossed the 90% threshold.
Many analysts say they were surprised to see market recovery expand quickly after the S&P 500 plunged 34% in one month in February and March. Many were also amazed to see traders approaching many stocks – from hard-hit cruise shares to financially distressed companies such as Hertz Global and Chesapeake Energy.
Many of the moves were from day traders who flocked to online platforms like Robinhood Markets, which offer zero commissions trading to take advantage of low stock prices. Some observers have warned that this is a sign of a fever of speculation. But stable companies, with strong balance sheets, have risen with the tide.
Other market-wide metrics, such as the number of stocks that record 52-week highs, now signal that the market is still in the early stages of recovery. Last Friday, for example, only 13 companies in the S&P index recorded a new record – much less than 74 stocks recorded a 52-week high on that day (June 19) in 2019.
“Most stocks below their peak.”
A known technical analyst for the market said the measurement tends to be lagging behind the market. Most stocks are below their peak, as is the 500 S&P index, but if the course continues and there are only a few new highs, it will shine a red light.
Many analysts point out that today’s market is far from typical, and investors face a dizzying amount of information, making the road ahead blurry and recovery fragile. The rise in COVID-19 virus infections and hospitalizations in some states threatens to slow business down for reopening. Simultaneously, tensions between the US and China, and the political uncertainty ahead for the November presidential election have all prompted some investors to sit on the fence.
A sudden exercise in equities earlier this month, in which the S&P 500 fell nearly 6% in one day, scared many investors and lowered market-wide indices from their recent highs. However, most of those metrics came back up last week.
Adam Kos, president of the Liberty Capital Management Group, which tracks some technical indicators, said he would “take a break, waiting for things to work out,” and then find entry points back into the market. I think it would be irresponsible to be so bullish based only on historical market-wide statistics,” Kos said. “If the market has taught us something this year, it’s all possible.”