Investors may think the market’s momentum is due for a breather. The S&P 500 (.SPX) has gained about 12% this year, including dividends. Even after a slight downturn of 0.4% on Monday, that is quite respectable by historical standards.
But some strategists say technical indicators are pointing to more gains, both in the near-term and for the remainder of the year.
One such bullish chartist is JC O’Hara, chief market technician for MKM Partners. He pointed out in a Sunday note that the S&P 500 has traded above its rising 10-day moving average for 39 consecutive days, the longest such winning streak since April 2010, and one of the longest in history. Rallies of this nature have been a good sign for momentum to continue through the end of the first quarter.
Moreover, when stocks have been this strong in January and February, the market has returned an average 20% for the full year, according to O’Hara. Since 1967, there have been 11 cases where the market has gained more than 8% in the first two months of the year. Only once were full-year returns less than 12%—in 1987 when a crash that October resulted in a 2% price gain for the full year.
Technical indicators are only one timing tool, of course. But O’Hara sees other positive signs for equities.
For one, exposure to U.S. equity markets by active managers has increased to 80%, more than double the levels of late 2018, he notes, citing the National Association of Active Investment Managers. Active managers aren’t necessarily great at market timing (and some might argue their bullishness is a contrarian indicator). But O’Hara views it as a sign that stock pickers still have cash on the sidelines that they can put to work.
“This is not extreme and just above the 5-year average of 75%,” he writes. “Risk increases when managers move above 90%.”
One other sign of risk-taking is evident in the rally in biotech stocks. The S&P Biotechnology Select Industry index is up 26% this year. That is encouraging for not only the health care sector but for the entire market, O’Hara writes.
None of this means every sector will do well, or that momentum can't stall. The rally this year has been predicated on a more dovish Federal Reserve and hopes for a trade deal between the U.S. and China. If either outcome fails to materialize, the year’s early gains would likely vanish.
Nonetheless, O’Hara sees pockets of opportunity even within sectors that he rates underperform. In the financials sector, for instance, the charts look bullish for First Bancorp (FBP), Lending Tree (TREE), Stifel Financial (SF) and Bank of America (BAC), he writes. Bond yields have inched up lately, recently crossing above their 50-day moving average. Steeper yields would help bank profit margins (by increasing their net interest income spreads), and if yields move up a bit more, the sector could start to outperform.
The energy sector has rallied 15.5% this year, beating the broader market. O’Hara still isn’t a fan of it, largely because crude oil prices have stagnated below $58 a barrel. But some stocks are showing positive momentum. Among his picks: Chevron (CVX), Kinder Morgan (KMI), ProPetro Holding (PUMP), and Exxon Mobil (XOM).
Construction stocks also hold appeal, in his view. Investors may be hoping for a big infrastructure bill out of Congress or improved industrial momentum in the economy. Either way, several of them have done well lately and should still have positive price momentum. O’Hara’s picks in that area include Vulcan Materials (VMC), Martin Marietta Materials (MLM), Eagle Materials (EXP), and U.S. Concrete (USCR).
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