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- The January decline in stocks has bulls on notice as volatility surges and several technical support levels are broken.
- Ned Davis Research suggests investors monitor momentum to gauge if stocks will recover in a sustainable way.
- “Another round of breadth thrusts would signal the cyclical bull has a new lease on life,” NDR said.
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The S&P 500’s year-to-date decline of 9% is on pace to be the worst start ever for the stock market, and now investors are wondering if the decline will continue, or if a typical “V-shaped” recovery will materialize like it did throughout 2020 and 2021.
According to a Wednesday note from Ned Davis Research, investors can monitor the so-called breadth thrust technical indicator to gauge whether stocks are ready for a relief rally that is sustainable enough to extend the life of the current bull market.
The breadth thrust indicator tracks momentum in the stock market. The “thrust” occurs when a high percentage of stocks rally together, and NDR monitors when 90% of stocks climb above the 10-day moving average.
Not helping stocks in recent weeks has been the loss of support at the rising 200-day moving average for broader indices like the S&P 500 and Nasdaq 100. It’s the same story for individual stocks, with 55% of S&P 500 listings trading below their 200-day moving average as of Thursday.
While current breadth and investor sentiment readings indicate the market is in short-term oversold territory and could be ready for a bounce, that’s not enough to drive a sustainable move higher.
“Short-term oversold readings are widespread, but intermediate-term and long-term signals have not fired,” NDR said, adding that “the challenge with oversold and sentiment indicators is that they can be early.”
Breadth thrusts, however, offer a higher conviction signal that a bottom may indeed have been found. The last time such a signal occurred was in March 2021. Stocks went on to rally more than 20% by year-end.
Historically, the S&P 500 was higher 72% of the time 10 days after a breadth thrust signal, and was higher 97% of the time one year after a breadth thrust signal, according to NDR.
“After the March 2020 bottom, breadth thrusts were common after even minor pullbacks, but they have been absent in recent months, including just missing on the Santa Claus rally. Another round would signal the cyclical bull market has a new lease on life,” NDR concluded.
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