It’s been a remarkable recovery for the market off the lows reached at the end of March. The S&P 500 is back at all-time highs, but even more notable has been the consistency and magnitude of upside over the last two months. The S&P 500 has risen each of the last eight weeks and, as of May 28th, is currently on track for its ninth consecutive positive week.
There’s a market adage that says strength begets strength, meaning that a market performing well is more likely to continue that trend going forward. At the same time, periods of sharply positive movement can also be viewed as pushing things into overbought territory, giving way to a period of cooling off. Given these opposing forces, do similar periods of rallying suggest further upside or a slowdown?
To start, it’s rare for the S&P 500 to rise so many weeks in a row. According to Nasdaq Dorsey Wright, there have only been twenty instances during which the market has been up for eight weeks in a row dating back to 1950, and this is only the fourth time it’s occurred in the last twenty years. Despite longer streaks being uncommon, the market’s outlook hasn’t changed significantly depending on whether it’s been on a long streak. If anything, streaks around the seven-to-nine-week range have been constructive in the near-term, averaging three-month returns north of 3%. Meanwhile, the market’s one-year return has been around 9% to 11% whether the market declined the prior week or was up ten weeks in a row. Streaks longer than 10 weeks have performed worse, but there are so few instances (only two occasions) that we’d consider it mostly noise. Just because the market has seen consistent gains doesn’t mean that the market has materially strengthened during that period. The market was higher for eight weeks in a row in September 1997, but the S&P 500 only gained 3.6% during that period. As a result, investors shouldn’t adjust portfolios much just because the market is on a positive streak.
Source: Nasdaq Dorsey Wright
While the direction of movement is important, the magnitude of that movement is often a more important factor when evaluating momentum. Thankfully, the recent recovery has been even more notable for its level of upside. Over the past eight weeks, the market has gained an astonishing 17.3%, placing it in the 99th percentile of all eight-week periods. There have only been 16 other occasions during which the market has gained more than 15% in eight weeks, with the last time occurring almost exactly a year ago coming off the Tariff Tantrum bottom. When the market gains so much in such a short period, it’s historically an indication of a strong market. The S&P 500 has averaged a one-year return of 17.5% from those instances, generating positive returns at a similarly above-average rate of 88%.
Source: Nasdaq Dorsey Wright
Overall, investors should certainly consider the overbought posture of the market. But to reiterate recent research, an overbought market can always become more overbought, and a strong market is usually required to push things into extended territory. Strength begets strength, and improvement in the market over the past two months has historically been a sign of positive things to come.
The current reading for the PR4050 is: U.S. Equity Core = 99.30% & Money Market = 2.82%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing International Equities and Domestic Equities in the top two spots, while both maintain a commanding lead over Cash and Fixed Income.
Source: Nasdaq Dorsey Wright
P.S. If you believe this information would be of benefit to anyone you know, please share this communication with them. Also, if you, or someone you know, would like to be added to the weekly market update, please click here to provide us with the e-mail address.
Main Street Wealth Advisors
33801 1st Way South, Suite 271
Federal Way, WA 98003
Office: (253) 944-1047
Fax: (253) 944-1075
www.mainstreetwa.com
ART-1116629
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. All indices are unmanaged and may not be invested into directly.
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.
Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolios across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The S&P 500® Index: A free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500® are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ.
MSCI World Index: A broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.