For months, I’ve stuck to the same investing playbook…
Bear markets typically end with panic and capitulation. And importantly, as I’ve noted in the past, the pain often doesn’t stop until after the Federal Reserve lowers interest rates.
This trend goes back many decades. It’s why I’ve remained cautious in recent months. And it’s why we’ve continued to watch the Fed – and other key indicators – for any clues.
I’ve expected that an “earnings recession” this year would result in another leg down in this bear market. So as a result, I’ve urged folks to remain vigilant heading into 2023.
Now, I still believe an earnings recession could occur. Remember, that’s two straight quarters of zero earnings growth in the S&P 500 Index. And it’s a real possibility this year.
With that in mind, you might be wondering why I’m turning “bullish” today…
After all, the Fed keeps raising interest rates. And again, that was a big part of our “bearish” playbook in recent months.
Well, it all comes down to a guiding principle for making money in the market. It’s something simple that I learned from my friend, Marty Zweig, many years ago…
Watch the Fed and listen to the market.
You see, despite the Fed’s insistence that rates will stay higher for longer, the market is saying something else. As I’ll explain today, one key indicator is telling us to be bullish…
And I’m now listening.
Let’s get into all the details…
It comes down to market “breadth”…
You see, the number of advancing stocks versus declining stocks in the New York Stock Exchange recently triggered a “thrust” signal. And notably… this shift leads us to believe that the bear market of 2022 is just about over.
The following chart is based on data from InvesTech Research. It shows all the times since 1950 that the ratio of the 10-day total of advancing stocks divided by the 10-day total of declining stocks exceeded 2.
In other words, it shows us the periods when advancing stocks far outweighed declining ones throughout history. It’s a key indicator of market breadth.
As you can see, this breadth-thrust signal has only triggered 19 times over the past 73 years. And importantly, every time… it was an incredibly bullish setup for stocks.
Take a look…
Now, I’m not saying everything will be smooth sailing for investors from here.
The markets will likely remain volatile in the months ahead. For example, in the previous 18 instances, pullbacks of 3% to 8% followed the initial breadth-thrust signal.
But as we’ve learned today, the tides are now turning…
The market just flashed a critical “buy soon” signal. This signal has only happened 18 other times dating back to 1950. And it’s an encouraging sign for stocks moving forward.
Even better, another piece of data shows that stocks could be headed for double-digit gains in 2023 after falling nearly 20% last year. I’ll explain that data in detail tomorrow.
This is a bullish setup. Ultimately, stocks could surge to a new all-time high.
For now, we should expect a strong first half of 2023 followed by choppier price action.
The volatility likely isn’t over yet. But a new bull phase could be here.
Good investing,
Marc Chaikin
