Game of Trades: This Hasn’t Happened to Stocks Since 1967

Since January, stocks are up about 11 percent. That move occurred after a signal triggered suggesting that stocks would post above-average returns.

If that signal continues, the market rally could continue. And it’s even possible that the market hits a new all-time high before the end of the year. However, there remains the possibility of a reversal instead.

That’s because the aggressive moves from the Federal Reserve increases market vulnerability.

The signal is based on market breadth and breakaway momentum. Markets had massive breadth at the start of the year, with most stocks trending higher.

Even with a few big-cap tech names really pulling the market, the inclusion of smaller stocks helped signal a bullish move. The signal is more visible when looking at the S&P 500 index on an equally weighted basis.

Going forward, this signal suggests major market outperformance over a six, twelve, and eighteen month period. At the six month mark, that trend holds true. Markets tend to post average returns of 19 percent 12 months later.

That suggests some further upside in the latter half of 2023. However, in today’s market, the excess returns have largely been clustered in companies driving a majority of their business from artificial intelligence. Plus, this breadth signal has never occurred before during a time when the Fed has been raising interest rates.

So investors may want to keep an eye on this trend, and not be surprised if it doesn’t play out fully this time.

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