Gains haven't yet ticked all the bull-market boxes
Broader is better when it comes to the stock market rally and some analysts see technical signs that gains may be signaling the end of the 2022 bear market, though it's too early to say for sure.
"The risk that the recent advance is merely a bear market rally has not been eliminated. But...the technical improvement up to this point is more akin to a new cyclical bull market than a bear market rally," said Ed Clissold and Thanh Nguyen of Ned Davis Research, in a Tuesday note.
Technical analysts pay close attention to various measures of market breadth -- or how many stocks are participating in a move up or down.
Clissold and Nguyen noted that the rally that followed Federal Reserve Chair Jerome Powell's July 27 news conference produced a pair of rare "breadth thrust" signals: first, the percentage of stocks hitting 20-day new highs rose above 55% for the first time since June 2020; second, the ratio of 10-day advances to 10-day declines rose to 1.9 for the first time since 2021. The moves came after a 10:1 up day for S&P 500 stocks earlier in July.
Breadth-thrust indicators are designed to be rare, but the growing role of exchange-traded funds, algorithmic trading and other factors have increased their frequency in the last 13 years, the analysts noted. Clissold and Nguyen said they still offer useful signals but require a "trust but verify" approach.
As for the latest moves, they noted that earlier rallies off the March and May lows triggered two other breadth thrust signals each. "The fact that each of the three indicators that fired in July did not earlier in 2022 is a change worth noting," the analysts wrote.
Those earlier rallies, of course, proved to be head fakes. That means the abiding question for investors is whether the recent gains is just another in a series of failed rallies in a cyclical bear market or the early stages of a new bull market, the analysts acknowledged.
They found that three indicators -- the percentage of stocks at 21-day new highs, percentage of stocks at 63-day new highs, and the percentage of stocks above their 50-day moving averages, are higher than not only bear market rally medians, but the new bull market medians as well.
Clissold and Nguyen said NDR's "Big Mo Tape," a measure of the percentage of subindustries in uptrends, stands in between the bear-rally median and the new bull market median.
Overall, the current market setup trails the technical improvement that was seen after lows in 2009, 2011 and 2016, but is stronger than the start of several bull markets from the late 1980s through the early 2000s for most breadth measures, they said.
The Big Mo Tape is the one to watch for additional technical confirmation, the analysts said. A continued climb in coming weeks would see it join other technical gauges in being "clearly more consistent with a cyclical bull than a bear-market rally," they wrote.