20% Rally as Bullish Indicators Flash

20% Rally as Bullish Indicators Flash

  • There are three stock market indicators that are showing a bullish signal, according to Fundstrat’s Tom Lee.
  • Lee pointed to the increase in market breadth, a measure of winning stocks, in three separate measures of the S&P 500.
  • When those indicators flash simultaneously, it’s a reliable sign of a future rally and stocks could gain 20% this year, he said.

A bullish trifecta of stock market indicators is flashing, and it’s a reliable sign that a 20% rally in stocks could be on the horizon, according to Fundstrat’s head of research Tom Lee.

Lee pointed to the increase in market breadth in the S&P 500, a measure of how many stocks are gaining at a time. In particular, there are three separate breadth indicators showing a rally in winning stocks: Whaley Breadth Thrust, Walter Deemer Breakaway Momentum, Triple 70 Thrust.

These technical indicators have a good track record in predicting a major rally in stocks, especially when they occur simultaneously. When at least two of those indicators show increasing market breadth, the S&P 500 gains an average of 24% over the next year, according to Fundstrat.

But the current market shows an even more positive outlook, as all three indicators are blinking. It’s the only time all three breadth indicators have blinked since 1970, an “unprecedented trifecta,” market research firm Quantifiable Edges said in a recent note.

And it’s a strong suggestion that a big rally could be in the works, particularly as inflation eases and the Federal Reserve begins to backtrack on its tightening efforts.

“The recovery in market breadth is a sign that demand for shares is picking up. We know investors are not ‘taking risks’ in 2023,” Lee said. “All of this supports strengthening stocks in 2023.”

Lee has said he thinks investors expect at least a 20% rally in the S&P 500 this year, as it’s rare for the S&P 500 to have flat or negative returns after losing the previous year. Since 1950, the stock index has risen more than 20% after a negative year 53% of the time. Inflation, a major drag on stocks in 2022, has also cooled from a 41-year record, suggesting the Fed may pause raising interest rates and possibly even start cutting them in 2023.

“We think 2023 is arguably more like 1982, when stocks went almost vertical,” Lee said.

His perspective is contrary to that of many other Wall Street strategists. Bank of America, Deutsche Bank and Morgan Stanley have all forecast a 20-25% drop in the S&P 500 in the first half of the year. A veteran chief investment officer at Gateway Capital told Insider this week that the stock could crash in 2023 as structural changes in the economy mean the “bull market cocktail” is over.

Leave a Reply

Your email address will not be published. Required fields are marked *