Newsletter tracker Mark Hulbert says that the market has recently triggered a rare “buy” signal that has historically been a precursor to strong stock gains.
The indicator is termed “breadth thrust” by Ned Davis Research, the firm whose data Hulbert cites in his latest MarketWatch article. The indicator flashes a “buy” signal when percentage of common stocks trading above their 50-day moving averages rises above 90%.
The signal has occurred only 13 times since 1967, Hulbert says — and three of those instances have occurred since the March 2009 low, the most recent coming just a couple weeks ago. Historically, following the signal, the S&P 500 has averaged returns of 4.6% over the next month; 8.2% over the next quarter; 13.1% over the next six months; and 19.7% over the next year. In the worst-performing one-year period after the signal occurred, the S&P still gained 11.6%, Hulbert says.
“It’s worth noting, furthermore, that unlike many other trend-following indicators that have been biased upwards in recent years by the increasing number of interest-rate sensitive issues, Davis’ calculations are based on a subset of stocks that eliminates closed-end funds, bond funds, exchange-traded funds, and the like,” Hulbert says, though he adds that there’s of course no guarantee that the buy signal will work every time in the future.