An Update On A Bullish Indicator With A Perfect Track Record

I predominantly focus on fundamentals and the rates of change in the economic data to formulate my outlooks for the market and economy. Fundamentals were the basis for my expectation at the beginning of this year that we would realize a soft landing and new bull market during 2023. That said, it is nice to see technical developments in the marketplace support one’s fundamental outlook. I have discussed many in my Daily Briefs as this year has progressed, and nearly all have been bullish, but the most bullish of all was triggered on January 12. I considered it to stand out more than any other indicator because of its astounding track record. This report is an update on its progress after six months.

Market breadth is the focus of this technical indicator. Breadth is a measurement of how many stocks within an index are participating to the upside when the index is rising. On January 12, a Breakaway Momentum buy signal was triggered, which is an indicator crafted by esteemed technician Walter Deemer. It is rare, because it requires the ratio of advancing to declining stocks on the NYSE to exceed 1.97 over a ten-day period. It has only happened 24 times since 1945, and it was triggered for a 25th time in January when the S&P 500 closed at 3,898.

The shorter time frames, as seen in the chart above, have lower probabilities of positive returns after the trigger, but they are still impressive. This time was no different, as three of the five time periods noted above were positive.

One-week return was -2.13%

Two-week return was +1.93%

One-month return was +2.46%

Two-month return was -1.63%

Three-month return was +3.06%

The returns have been positive 96% of the time for the six- and 12-month time periods from the time of the trigger. Therefore, it came as no surprise that we logged a positive return for the S&P 500 yesterday. With the index closing at 4,472 it is up 14.7% from the day Breakaway Momentum was triggered. That is right in line with the six-month average of 14% for the previous 24 times we had a buy signal from this indicator. If we look out another six months, the 12-month average return has been just over 20%. That would take us to approximately 4,677 and approaching a new all-time high.

Another aspect of historical performance that falls in line with this indicator is that it seems all but assured that July’s rate hike by the Fed will be its last. According to Barclays research, the S&P 500 has averaged a gain of 10% in the 12-month period following the final rate hike of a rate-hike cycle. The problems for the market arise when the Fed starts to cut rates, because those cuts are obviously intended to address economic weakness that today does not appear to be an issue in the near future. A 10% rally from current levels would put us near the 4,900 level and at a new all-time high, which is consistent with my recent proclamation on June 26 that we would see a new all-time high for the index in the coming 12-months.

The rates of change in economic data, led by inflation, started to turn favorable last summer and fall. The market gave us confirmation of that fact at the beginning of this year through indicators like Walter Deemer’s Breakaway Momentum. Now we have confirmation that the bull market for the S&P 500 did begin last October, and the rally has started to broaden. The average stock has significantly outperformed over the past six weeks, and that should continue as we begin the earnings season for the second quarter. Enjoy the ride!

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