Another Signal Just Flashed...

Investors,

U.S. stocks are making new all-time highs while a new statistical study indicates that bullish momentum is about to increase, which I’ll share in just a moment.

First thing’s first… which stocks are making new all-time highs?

The Dow Jones, the S&P 500, and the Nasdaq-100 all made new ATH’s this week.

Value stocks ($VTV) made new ATH’s, while growth stocks ($VUG) did too.

So did technology stocks ($XLK).

Oh, high dividend ($HDV) & dividend growth stocks ($DGRO) did too.

Financials ($XLF), broker-dealers ($IAI), & insurance ($IAK) made new ATH’s.

Infrastructure stocks ($IFRA) & water resource stocks ($PHO) also made new ATH’s.

The NYSE FANG+ Index ($NYFANG) & mega-cap growth ($MGK) made new ATH’s.

On second thought, U.S. stocks aren’t the only geographic region performing well…

Each of the following countries/regions made new 52-week highs on Friday:

• Italy

• Poland

• Norway

• Australia

• Switzerland

• Malaysia

• Austria

• Turkey

• The United Kingdom

• Emerging markets ex-China

It’s as if an abundance of stocks, in various sectors, industry groups, thematics, and geographies are trending higher. Boring stocks, international stocks, large stocks, innovative stocks, and stocks you’ve never heard of are making all-time highs.

For 18 months, a cohort of investors have tried to convince us that a U.S. recession and a global downturn was on our doorstep, which would result in significant downside for asset prices. They told us that only 7 stocks were going up and that weak breadth was a sign of poor market fundamentals. They told us that expected future earnings were too rosy and that Wall Street would be forced to revise their estimates lower. They told us that disinflation wasn’t real and that inflation was bound to accelerate. They told us that the labor market was going to implode…

Yet here we are with stocks at all-time highs.

Thankfully, Cubic Analytics readers have been well-equipped to disarm the bearish narratives highlighted above, either recognizing that they weren’t true at all or that they were irrelevant for predicting asset returns.

My message and outlook has been consistent: softness (not weakness) is bullish for asset prices amidst a disinflationary environment where the broader economy continues to be characterized as resilient & dynamic.

From a qualitative perspective, this has been the thesis for more than a year.

It’s still my same thesis today.

From a quantitative perspective, we know that asset prices trend and that different indicators, statistical studies, & market internals continue to reflect bullish dynamics.

Just this week, a new signal flashed…

Specifically, the 8-week Williams%R Oscillator just completed a momentum thrust from oversold (lower-bound) to overbought (upper-bound). While 8 weeks might seem arbitrary at first glance, it’s the equivalent of 2 months of price data, which does an excellent job of capturing low-noise, short-term signals and momentum thrusts.

Visually, it’s clear that this signal is extremely effective, but I decided to track the forward returns for each of the times that the signal flashed since 2012:

Going back to 2012, this signal has flashed 25 times (roughly 2x/year) and flashed for the 26th time last week! After the signal flashes, the S&P 500 is higher one year later 87.5% of the time, much higher than the average 1-year positivity rate of roughly 70%.

By definition, this means that the signal has produced consistent & outsized returns.

This is confirmed by an average 1Y return of +13.6% after the signal flashes, clearly outperforming the S&P 500’s average calendar year return of +9% post-WW2.

Interestingly, 2-month returns are the weakest, but followed by strong upside in the 3M & 6M periods. This indicates that any potential weakness in the coming 2 months, specifically after the 1st month, should be viewed as a buying opportunity within an uptrend.

We’ve been in an uptrend.
We continue to be in an uptrend.
History tell us that we’re likely to remain in an uptrend.

My belief is that it’s still appropriate to align with the uptrend and pay attention to objectively bullish data and signals, like the one above, while recognizing the importance of managing risk and that statistics don’t operate in a vacuum.

Whether you chose to align with the trend or fight it is your choice.

I know which choice I’ll continue to make.

Caleb Franzen

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DISCLAIMER:

This report expresses the views of the author as of the date it was published, and are subject to change without notice. The author believes that the information, data, and charts contained within this report are accurate, but cannot guarantee the accuracy of such information.

The investment thesis, security analysis, risk appetite, and time frames expressed above are strictly those of the author and are not intended to be interpreted as financial advice. As such, market views covered in this publication are not to be considered investment advice and should be regarded as information only. The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security.

Each investor is responsible to conduct their own due diligence and to understand the risks associated with any information that is reviewed. The information contained herein does not constitute and shouldn’t be construed as a solicitation of advisory services. Consult a registered financial advisor and/or certified financial planner before making any investment decisions.