Stock Market Breadth Strengthens As Weight Of Evidence Turns Bullish

As impressive as the gains in the broader stock market indices are, it is what is happening beneath the surface that is even more encouraging.

The 7 percent rally in the S&P 500 Index last week was the best weekly gain since April and it helped both the 10-week and 40-week moving averages turn higher. The S&P 500 Index also posted its highest weekly close on record… and note that Monday morning news of an effective COVID-19 vaccine has the index obliterating those previous peaks and trading in record territory.

While the news of an effective vaccine suggest an encouraging path forward, this is not a time to be complacent from a health, investment, or economic perspective.

Those are the headlines, but the real market news of the past week seems to be in the resiliency and rebound in stock market breadth indicators.

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Index-level gains were accompanied by strength at the sector and industry group level. Our industry-group trend indicator has turned higher and sector-levels have bounced back into positive territory.

In terms of global market participation, last week saw the percentage of world markets trading above their 50-day moving averages rise from 6% to more than 70% (this peaked in October at 63%). It is hard to overestimate the importance of this improvement. All of the net gains in stocks over the past 3 years (and the bulk of the net gains over the past 40 years) have come when more than 70% of world markets are trading above their 50-day moving averages. Emerging markets are leading the way, with more than three-quarters trading above their 50-day moving averages.

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Sentiment indicators have shown little pessimism in the wake of excessive optimism in September and October. Last week’s price gains coupled with vaccine-related news could prompt a swift return to widespread complacency and optimism. Equity ETF flows have already started to heat up and options data shows a quick dissipation of any fear that emerged prior to the election.

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Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.