A number of technical signals used by analysts to gauge the health of the stock market have flipped to positive from negative, a shift that is buttressing some investors’ faith in the 2019 rebound despite last week’s volatility.
While the technical measures mostly amount to various observations that stocks have gone up sharply this year, they are being consulted by investors who are struggling to reconcile a dizzying December swoon with a dramatic January recovery.
Major U.S. indexes have crossed or are nearing their 200-day moving averages and the number of stocks setting 52-week highs is on the rise, among other indicators favored by portfolio managers and investment gurus trying to divine the market’s next move.
The rally is widely seen as resulting from a more cautious rate-increase outlook from the Federal Reserve and continuing faith in the U.S. economy. But those factors haven’t quelled concerns about U.S.-China trade tensions and a potential slowdown in corporate earnings that would spell trouble for the nearly decade-old bull market.
Investors will be awaiting the outcome of the next round of trade negotiations this week in Beijing, along with monitoring the latest batch of earnings reports. Cisco Systems Inc. (CSCO) and Deere & Co. (DE), two trade-sensitive companies, are among those on the docket. Analysts will also be monitoring inflation data after the Fed’s reversal reinvigorated confidence in the economic expansion.
Signs of economic stability in the U.S. are “giving the more fundamental-based investors faith coming back into the market, which is then driving what technical traders are seeing on their screen,” said Shawn Cruz, manager of trader strategy at TD Ameritrade.
Some analysts suggest momentum can help propel major indexes past last year’s peaks. While the Dow Jones Industrial Average (.DJI) has surged 15% from its Christmas Eve low and is coming off its best seven-week stretch since November 2011, the blue-chip index is still 6.4% below its October record.
The Dow industrials crossed above their 200-day moving average on Jan. 30 for the first time since early December, a bullish signal for market technicians who watch moving averages to trace a trend line of an asset’s recent performance. Their prior 37-session streak below that level was the longest since March 2016, according to Dow Jones Market Data.
Since crossing the threshold, the blue chips closed out their best month since October 2015 and hit a two-month high Feb. 5.
“Momentum is a key component right now,” said Paul Brigandi, managing director and head of trading at exchange-traded fund provider Direxion Investments. “A lot of people are jumping in to get on board.”
The S&P 500 (.SPX), meanwhile, has been closing in on its 200-day moving average of 2742.63. Clearing that threshold would be another positive sign as the index has approached the mark in recent days, only to fall back down. Its recent pause just below that level, along with investors’ withdrawal of money from stock funds in recent weeks, illustrate that many remain cautious about the rebound.
Other indicators tied to the S&P 500 have turned bullish after flashing red for much of the fourth quarter. More than 80% of the companies in the index are now trading above their 50-day moving averages, up from less than 1% on Christmas Eve.
And many S&P 500 companies have hit new 52-week highs of late, after the index went 14 days through Jan. 7 without any such moves, the longest period since May 2009. On Friday, 22 firms in the S&P 500 set 52-week highs.
Among the companies notching such milestones last week were aerospace giant Boeing Co. (BA), chip maker Broadcom Inc. (AVGO), software firm Red Hat Inc. (RHT) and insurer Anthem Inc. (ANTM), a positive development for analysts looking for market strength across sectors.
“We’re pretty optimistic right now,” said Gene Goldman, chief investment officer at Cetera Investment Management, who has recommended clients increase investments in faster-growing sectors like technology, as well as consumer discretionary and health care.
One reason this year’s rally has been so broad is that positive market signals have reinforced rebounding indicators tied to the U.S. economy. For example, the gap between short- and long-term Treasury yields, known as the yield curve, has stabilized, signaling investors are less concerned about U.S. growth. That in turn has boosted shares of banks, which borrow on short time frames and loan over longer terms.
The KBW Nasdaq Bank Index (.BKX) has risen 12% this year, lifted by Citigroup Inc. (C) with a 19% jump and Bank of America Corp. (BAC), which is up 15%.
And the rebound in oil prices—U.S. crude has climbed 16% in 2019—has spurred a similar rebound in energy stocks, while indicating investor fears of a lingering supply glut have eased.
Still, some observers say they view the recent strength across different areas of the market as a sign that stocks are susceptible to a pullback. Of the 30 stocks in the Dow industrials, 26 have notched gains for the year, as have 466 of those in the S&P 500. And many of the big technology and internet stocks like Facebook Inc. (FB) and Netflix Inc. (NFLX) that led the fourth-quarter selloff have surged more than 25% this year, prompting some investors to fear the bounceback has been too swift.
It will also become harder for stocks to move much higher the further their recovery goes, analysts say.
“We’re exiting the V-shape nature of the rally is my guess,” said David Lafferty, chief market strategist at Natixis Investment Managers. “The momentum and the technical pressure is coming off a little bit.”
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