While some strategists are doubtful that the stock market’s recent rally has legs, Jeff deGraaf, Renaissance Macro’s chairman and head of technical research, sees an indicator pointing to a robust bull market ahead.
Last week, the 20-day high thrust, which deGraaf calls an “escape velocity” signal, flashed. The indicator, which looks at the price action of S&P 500 stocks, is triggered when over 20% of stocks hit 20-day highs.
As of May 12, 57.65% of stocks had hit a 20-day high.
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According to this indicator, the stock market could be safely in bull territory after hitting a sustainable bottom.
“This 20-day high rule just tells us that breadth and money are coming into the market on a wholesale basis,” deGraaf said on his weekly webinar on May 13. “You just don’t find these things happening in the midst of a bear market.”
When it triggers, the market tends to do very well the year afterwards. Historically, the stock market has rallied an average of 16% 12 months out, signaling that the market is likely to have reached a durable bottom.
Most recently, the escape velocity signal was also triggered in late 2023 and briefly again in August 2024 — two periods that preceded a stock-market run-up.
That doesn’t mean there won’t be any pullbacks, though. Within a year of the signal flashing, the average drawdown has been around 10%. While investors should buckle up for short-term volatility, the overall impact of the escape velocity indicator points to gains over the 12 months ahead.
Another positive signal deGraaf sees in the market is the ratio of bulls to bears. While there are more bears than bulls in the market, the number of bulls is rising.
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Annualized average daily returns are at their highest when sentiment is overall negative but gradually recovering.
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“Historically, this is easily the best zone to be in, when you have a proliferation of bears but that is starting to contract,” deGraaf said.
Going forward, deGraaf is looking for a higher percentage of stocks above their 20-day moving average to rise above 90% for a confirmation that the lows are in. A higher percentage of stocks trending above their 20-day moving average means the market rally is broad and healthy.
“That tends to be the last holdout of information for that escape velocity that ends up being bullish,” deGraaf said.
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