Here’s When the Next Bull Run Starts
I’ve been talking about market breadth a lot lately – the number of companies, as a percentage of the S&P 500, currently trading higher than their 50-day moving average (MA50).
The benefit of using this as a sentiment indicator is we know how it likes to move – from one extreme to the next.
I love the MA50. It tells us the trend that the market will be following – therefore telling us where the price of an investment will be going.
So, this is what the market breadth was showing us just yesterday:
That’s right, the rally we’ve been seeing over the last couple of days has pushed the number of companies trading over their MA50 to 88% of the S&P 500.
As I said, this indicator tends to move from one extreme to the next; once it gets to one side there really isn’t anywhere else for it to go outside of the other direction.
Now, let’s take an expanded view using the 200-day moving average (MA200):
Just so you understand the difference, the MA50 is an intermediate-term trend line – where the company will be going in the next 4-6 weeks. It’s our sweet spot.
The MA200, on the other hand, is going to give you a longer-term trend. That’s what “Uncle Warren” Buffett likes to look at.
On Tuesday we talked about some of the companies in the retail sector starting to challenge their MA200, and this wasn’t just for fun. This number has skyrocketed in the past couple of weeks, as you can see from the chart.
THIS IS A BIG DEAL.
Remember back in July and August when we had a rally? Take another look at the chart above, and you’ll see it shot through the roof at the time.
When this happens, the MA200 is a point of resistance for the market but, with the momentum building from the individual stocks, we may be able to see a break above the MA200 on the S&P 500.
Before we can see enough momentum for the S&P 500 to keep going this chart should be showing us a reading of 70%. This will cause all of the people on the short side of the market to go long – myself included.
As a note on this – a lot of the big ‘headline’ stocks like AAPL, AMZN, NVDA, AMEX, and TSLA, aren’t trading above their MA200, so all this action is happening without these companies finding any traction.
If we start to see these companies join the party, it is going to ignite an explosion that will push us right out of the bear market.
This setup isn’t going to be a short covering rally – it’s going to be a ‘get-out-the-shovels’ rally as you start throwing money at the market because traders will think it is the end of the bear market…
Frankly, I can’t argue against this much. In terms of defending the bear market thesis, the technicals aren’t giving me much.
So, here is how you are going to trade this shift in the market.
For starters, if we see the momentum continue, I would start trimming some of the shorts from your portfolio. This week has been light because of the holiday, so hold off on doing this right away; we’ll still have some volatility, and the volatility trends are going to be a factor over the next two months or so.
Watch these big companies I mentioned above. If they start to cross the MA200, start looking to fill your portfolio with long positions because we will be in one hell of a bull run.
Remember the market slows down a bit as we hit the end of the year. Traders are taking time with their families and I hope you’ll be doing the same. January also isn’t very promising as it typically isn’t a very bullish time, either.
Come February Though… This could play out as a real barn burner of a bull run. Don’t get too antsy and jump the gun yet. Right now these technical indicators are telling you that there is a dramatic shift coming in the market and changes in the technical trends.
All that said, I’d be remiss if I didn’t tell you that all of this could crash and burn at the hands of the Fed during the next rate hike – but we know what to expect from that, and if the rest of the market has been listening and expecting the same, it shouldn’t spoil the winter fun. It’s something I’ll be watching as we go along.
As always if anything changes I will let you know during the morning show.
Enjoy your dinner with family and friends – I’ll see you next week,
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November 24 2022
