The stock market could jump 21% as bullish indicators flash their strongest signal since 2020
- Stocks could rally 21%, as there are indicators flashing their strongest signal since 2020, according to Ned Davis Research.
- The firm pointed to the S&P 500, which recently formed a so-called golden cross.
Stocks could climb 21% higher this year, as there are bullish indicators in the market flashing their strongest signal since 2020, according to Ned Davis Research.
In a note on Monday, the research firm pointed to several indicators, including the firm's Fab Five Tape Component, a multi-indicator gauge of winning stocks in the S&P 500.
That model recently hit its highest level since December 2020, when the S&P 500 was on track to record its all-time-high in 2021.
In particular, the bullish signal has resulted from three indicators in the Fab Five model:
- The Volume Demand cross. This occurs when volume demand in the S&P 500 rises above volume supply, a sign that there are more buyers than sellers in the market causing prices to climb higher. The bullish signal flashed last week for the first time since May 2020.
- The 10-day advance/decline ratio. This is a gauge of winning stocks versus losing stocks over a 10-day period, and it's flashed its first "thrust signal" since July 2020, strategists said.
- The golden cross. This is a bullish indicator that flashes when the 50-day moving average surpasses the 200-day moving average. For the S&P 500, this happened on Friday, after most other global stock indices and individual US sectors saw it earlier, Ned Davis Research said.
These signals have been common in the stock market, but the bullish outlook on stocks in 2023 has been confirmed by other longer-term indicators, the firm added, pointing for instance to Ned Davis Research's Rally Watch aggregate, a collection of 16 bullish stock market indicators.
The aggregate recently reached 63%, its highest level since October 2020. Stocks have seen a median gain of 21% the following year after the Rally Watch aggregate surpasses 50%, suggesting a similar rally could be underway in 2023.
"Corrections can be expected in the months ahead. But as with the recovery that started after the bottom in 2020, the indications of trend improvement suggest that the sell-offs will take place within a strengthened uptrend that's likely to remain intact as 2023 progresses," the firm's strategists said.