A bullish trifecta of stock market indicators are flashing, and it's a reliable signal that a 20% rally in stocks could be on the horizon, according to Fundstrat's head of research Tom Lee.
Lee pointed to the surge in market breadth in the S&P 500, a measure of how many stocks are gaining at once. In particular, there are three separate breadth gauges are showing an uptick in winning stocks: the Whaley Breadth Thrust, the Walter Deemer Breakaway Momentum, the Triple 70 Thrust. These technical gauges have good track records in predicting a major rally in stocks, especially when they occur simultaneously. When at least two of those gauges are showing rising market breadth, the S&P 500 gains on average 24% over the next year, according to Fundstrat.
But the current market shows an even more positive outlook, since all three indicators are flashing. It's the only time all three breadth indicators have flashed since 1970 – an"unprecedented trifecta," market research firm Quantifiable Edges said in a recentAnd it's a strong suggestion that a huge rally could be in the works, particularly as inflation eases and the Federal Reserve begins to pull back on its monetary tightening efforts.
"The recovery in market breadth is a sign that demand for equities is recovering. We know investors are not 'risk-on' coming in 2023," Lee said."This all supports stocks strengthening in 2023."this year, as it's uncommon for the S&P 500 to have flat or negative returns after a losing the previous year. Since 1950, the stock index has risen more than 20% after a negative year 53% of the time.
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