July 22, 2022
Good morning,
We have talked about the possibility of a rally unfolding in front of us in the market for the past few morning notes, and that there would have to be ample evidence, primarily in the way of multiple breadth thrusts, to characterize the rally as anything other than the bear market kind (defined as a rally that does not lead to new highs but instead fails and returns to previous lows or even lower lows).
The March and May equity rallies this year were classic bear market rallies. How is the rally that started last Thursday doing? Tuesday’s rally was broad-based, with the S&P 500 gaining 2.8% and the Nasdaq Composite and the Russell 2000 both jumping more than 3%. The total volume of stocks that rose on the day was 17 times the total volume of stocks that fell on the day, the highest ratio since 3/24/2020, the day after the bear market low back then. Last Friday was an 11:1 up day, so Tuesday triggered a double 10:1 breadth thrust signal for the first time since 5/24/2021. Historically, the S&P 500 has gained more than twice its long-term mean one, three, and six months after double 10:1 signals, on average.
One does not live by a single signal alone. There are several types of breadth thrusts indicators – six in all. The double 10:1 indicator was the first breadth thrust signal since the June low. After the March and May lows, two other breadth thrust signals fired. In both cases, it was recommended that one take a “trust but verify” approach and wait for supporting signals to fire as well.
That leaves us watching for several breath thrust indicators to fire now to confirm this rally is sustainable. How sustainable the rally is will likely depend on monetary policy and earnings, but technical indicators will likely provide the information before Fed officials or management teams.
Hope you have a great weekend – stay cool.
Be well,
Mike