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By late October, the market situations have been dire certainly. The S&P 500 had damaged under its 200-day transferring common for the primary time since March. Solely 10% of S&P 500 members remained above their 50-day transferring common, that means a full 90% have been under this key short-term barometer.

What a change we have seen within the final six weeks!

We completed this week with round 88% of SPX names now above their 50-day transferring common, after briefly touching the 90% degree on Wednesday. The S&P 500 has now made one other new excessive for the yr, ending the week simply above 4700. That is proper, we’re solely about 2% under all-time highs!

So are the excessively constructive breadth readings in mid-December a very good factor or a foul factor for shares? The truth is somewhat of each.

Brief-Time period Upside Appears Restricted

Reviewing the p.c of shares above their 50-day transferring common, it appears clear which have reached an upside excessive. This indicator hardly ever touches the 90% degree, however it has really carried out so three different instances within the final 18 months.

The final time we noticed this excessive bullish studying was in July, because the SPX was testing the 4600 degree. The subsequent three months noticed a gradual decline for shares, ending within the late October low round 4100.

Again in late November 2022, the indicator pushed above 90% because the S&P 500 skilled its preliminary upward swing after the October 2022 low. The benchmark pulled again for about 4 weeks earlier than persevering with to a brand new swing excessive in February.

The third time we witnessed this degree of constructive breadth was again in August 2022, because the S&P was testing its 200-day transferring common from under. This was through the meat of the 2022 bear market part, so this extraordinarily constructive studying was fairly uncommon. Certain sufficient, we had about an eight-week decline into the October low quickly after.

These three declines, of 10%, 8%, and 17%, respectively, present that breadth is extraordinarily bullish, the short-term image really turns into bearish. It is all concerning the market adjusting decrease earlier than persevering with the earlier development.

However keep in mind, these have been all short-term declines of round 4 to 12 weeks. What concerning the long-term implications for these overbought patterns?

Lengthy-Time period Image Stays Optimistic

It seems that the returns 6-12 months after these indicators are literally fairly constructive. So, whereas the short-term implications are {that a} pullback is imminent, the long-term indication is extra that the uptrend is alive and properly.

We’re now bringing in twenty years of each day knowledge, with the underside panel exhibiting the p.c of S&P 500 shares above their 50-day transferring common. I’ve highlighted in pink any time this indicator has pushed above the important thing 90% degree, and have additionally included dashed vertical strains for every indication.

You will discover that what we mentioned above about short-term implications usually holds true over a number of cycles. We frequently see a pullback quickly after the 90% degree is reached, or, on the very least, a pause within the uptrend.

However now take a look at what occurs about 6-12 months after these indicators have occurred. In just about each occasion, you will see that the market has absolutely recovered after the pullback, usually reaching new highs inside a yr.

Now to be clear, a six-month decline is not any small concern. Some would say these could be “career-busting declines” should you’re on the flawed facet of them! However it ought to be reassuring as you overview this era in market historical past that these indicators have ultimately had a really completely happy ending for fairness buyers.

What to Count on in Q1 2024

We’re at present within the seasonally strongest a part of the yr, with November and December usually experiencing robust returns for shares. And in a pre-election yr like 2023, that seasonal tendency actually seems to be holding true.

Simply this week, we noticed extra financial knowledge suggesting that the Fed’s efforts to taper inflation seem to have been working. Fed Chair Powell’s feedback on Wednesday led to the most recent up transfer on this bullish fourth quarter, as buyers worth within the chance {that a} “comfortable touchdown” is increasingly more a probable end result.

There stay loads of dangers for equities into Q1 2024, together with rates of interest pushing again to the upside, volatility popping larger, and the US Greenback returning to its former position as a “wrecking ball for danger belongings,” as we noticed in 2022. However given the robust market breadth readings in mid-December, I’d say that the long-term image for shares seems to be as robust as ever.

RR#6,

Dave

P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.

The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any approach symbolize the views or opinions of some other particular person or entity.