As our Sean Dillon has been saying for a while now, underlying market technicals have dramatically improved since late last spring. The underlying trend and breadth of stocks has shifted from very negative last May to quite positive today. Technicals matter. To put it simply: it’s hard to get a down market up when technicals are working against you…..and vice versa. Market technicals are materially better today and that’s a good thing.
“Breakaway momentum” is a technical term that I think both Sean and I would rather him tackle (mainly because he’s better at technicals than me), but here goes. When the 10-day advance/decline ratio (stocks going up vs stocks going down) gets to a heightened level of 2:1 it is rare, bullish, and positive. It’s only happened 24 times in the last 80 years. In 23 of those 24 times the equity market was higher 12 months FORWARD. Forward returns during those 23 observations averaged +20%.
I am not saying the market is going immediately up and I am not saying it is going up 20% immediately. What I am saying is you must respect sentiment and positioning and technicals. Sentiment is extremely weak, positioning is also weak (albeit better than it was in early fall 2022), and technicals have dramatically improved. Data is data.
“Price leads sentiment” ®Sean Dillon CMT, CFTe®
Chief Investment Officer
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