The NDR Crowd Sentiment poll below measures market based and survey-based sentiment indicators to gauge if investors are optimistic or pessimistic. As mentioned, a few times over the last month investor sentiment was very pessimistic which is usually a great indicator of strong future returns. Especially if investors are pessimistic but sentiment starts to improve as the grey box indicates. Not surprising that sentiment is improving as prices rise!
Next let’s look at the relationship between price and momentum. We’ll follow the leader of the past 10 years by looking at the NASDAQ. The NASDAQ did lead the market lower as it peaked in November, compared to the S&P in January, and fell 21% at the March low. However, as we look at momentum as measured by the RSI in the bottom panel the downtrend LOST momentum from the January low to the March low. It may be a newer concept to some but essentially this signaled an exhaustion of sellers.
Lastly let’s look at participation. Participation, or breadth, is very useful to determine the veracity of the move higher in price. When breadth is very strong after a sizeable decline, we call that a breadth thrust and once again usually signals strong forward market returns. At the March low there were less than 10% of stocks over their 10-day moving average but on this rally that number ‘thrusted’ higher to 90% of stock over their 10-day moving average. Almost all the troops are following the general in this rally and, as mentioned, according to past occurrences back to 1980 leads to strong forward returns.
Mean and Median Returns After Breadth Thrust Signal
| Summary Item | 10 Days | 21 Days | 42 Days | 63 Days | 84 Days | 126 Days | 253 Days |
|---|---|---|---|---|---|---|---|
| Mean | 0.52 | 1.80 | 3.90 | 4.65 | 5.35 | 9.75 | 16.67 |
| Median | 0.96 | 1.73 | 3.97 | 5.46 | 6.43 | 9.12 | 14.23 |
| Number Up | 27 | 24 | 27 | 26 | 27 | 30 | 35 |
| Number Down | 10 | 12 | 9 | 10 | 9 | 6 | 1 |
| All Periods Mean | 0.39 | 0.82 | 1.62 | 2.45 | 3.29 | 5.01 | 10.46 |
There is a lot of evidence mounting in defense of a bottom in prices (what’s with March bottoms!). With monetary, geopolitical and mid-term election uncertainty still present there is likely to be continued volatility but from a technical perspective moves down in price should be bought.
Sean Dillon, CMT, CFTe
SVP, Investment Strategies
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