LPL Research - Longer-term technical indicators on equities continue to look strong
Some significant technical trend lines are in play, so we take a closer look at market technicals and sentiment this week. The longer-term technicals continue to look strong, and an evaluation of global market breadth suggests the path of least resistance remains higher for stocks. However, sentiment remains a much more mixed picture indicating that market volatility could finally be heating up.
LONG-TERM TRENDLINES SUPPORT HIGHER PRICES
It is easy to get lost in the daily news cycle, but a longer-term view can help put things in perspective. Two popular long-term trend lines used in technical analysis are the 50- and 200-day moving averages (MA). We have seen interesting developments in both indicators recently.
First up, on Thursday, April 12, the S&P 500 Index closed beneath the 50-day MA for the first time in 105 days [Figure 1]. This was the longest streak above the 50- day MA since 130 days in a row nearly six years ago. Could this be a sign of coming technical weakness? Going back to 1950*, the S&P 500 was above the 50-day MA for at least 100 days 14 times, and the performance after the initial close beneath this trend line did not suggest the start of a major breakdown. In fact, three months later the S&P 500 was up 2.2% on average, slightly higher than the average threemonth return of 2.1%. Six months later gains have been slightly below average (3.8% versus 4.3%), but still higher 10 out of the 13 times.
Turning to the 200-day MA, it is 4.3% below current index levels and continues to trend higher. In fact, it has closed at a new all-time high every day since last Halloween (October 2016). As you can see in Figure 1, this trend line provided nice support on the pre-U.S. election weakness and has been firmly pointing higher since rising last summer. With both the 50-day and 200-day moving averages trending higher, this is a sign that the technical backdrop remains strong and any weakness could be a buying opportunity.
AN EXPANDED LOOK AT MARKET BREADTH
We’ve noted many times over the past year that market breadth has been strong, and this should lead to ultimately higher prices; fortunately, that has been correct. One of our favorite market breadth indicators is the NYSE Composite Advance/Decline (A/D) line, which is part of LPL Research’s Five Forecasters. Simply put, we are seeing more stocks advance than decline, a sign of a healthy market. We took a closer look at this bullish indicator in our previous Weekly Market Commentary, “How Much Is Left in the Tank?”
Market breadth can also show how strong global markets are, not just U.S.-based equities, as we are also currently seeing uptrends across developed markets in Europe and Asia and in emerging markets (EM). What is unique right now is the 200-day moving average is in an uptrend for these eight global indexes: the S&P 500, Nasdaq Composite, NYSE Composite, Dow Jones Industrial and Transportation Averages, Russell 2000, MSCI Emerging Markets, and MSCI EAFE. That’s a lot of underlying global strength.
The recent signal took place in late February, and Figure 2 has the returns for the S&P 500 across various time frames after all eight indexes are in uptrends. As you can see, continued equity gains are normal; a year later the S&P 500 has never been lower, with an average gain of 12.1% (based on data since 1990).