Markets completed their best week of the year, with all the indices up smartly. The Dow gained 259 points (2.78%), the S&P500 was up 33 points (3.31%). However, the real action was in Tech and Small cap: As the Nasdaq sprinted almost 90 points (4.94%), while the iShares S&P600 small cap index (IJR) gained 6.34%.
Consider that this occurred as investors were digesting several negative inputs: The G7 / weak dollar, pre-announcements, and OPEC’s surprise cut in oil output, which sent crude prices higher. All that negative news was countered by offsetting positives, including the pre-announcement period was better than expected, ISM numbers did not meet the worst fears of traders and the first decent jobs report in 7 months.
There are hundreds of reasons why the markets should be petering out here – not the least of which is overhead resistance (see nearby chart) – but based upon historical precedents, the technical action last week suggests the markets will be higher 3 months from now.
Consider the very positive A/D skew last Wednesday: the advancing issues beat declining issues by a very strong 4.8-to-1 ratio on the NYSE. It’s worth noting that such a positive skew is very rare – and usually bodes well for future market performance.
A recent report (Co-authored by FTN Research’s Tony Dwyer and SentimenTrader’s Jason Goepfert) analyzed that ratio over the history of the S&P 500. There have been “54 occurrences since 1965 of NYSE advancing issues beating declining issues by 4.5-to-1 or greater ratio.
Placed into the context of a market trading above its 200-day moving average (such as we are now), however, there were only 11 instances of such this positive breadth thrust. In 10 of those 11 instances, the markets were higher 3 months later, with an average gain of 8.3%. The maximum gain was 19%; the one loss was for 4.4% after the breadth signal of November 1979.
All told, this represents a significant correlation, in our view. Note this research is similar to the price/volume studies Ned Davis Research did in the 1980s; Its also comparable to the 90/10 volume/price research performed by Paul Desmond of Lowry Reports (and discussed in our Contrary Indicators work last month).
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.