Bullish Signals for Stocks Emerge Under Market’s Gloomy Surface

(Bloomberg) — While U.S. stocks were flip-flopping in morning trading Monday, there are signs that investors are getting more bullish and snapping up beaten-down stocks.

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The S&P 500 Index is coming off its best week since November 2020, having posted four consecutive days of more than 1% gains for just the fifth time in history, according to LPL Financial. Historically, that has been encouraging for the stock market, as each time it’s happened the S&P has climbed more than 20% over the ensuing year, with an average return of 28%.

The key is its breadth also looks strong. Clusters of “breadth thrusts,” which occur when an extreme number of stocks advance rather than decline in a short period of time, have appeared. Technical analysts say these moves tend to happen around the beginning of new uptrends for equities.

That said, investors still appear to be defensive in their buying. Market strength has been led by sectors usually perceived as havens, like energy, health care, utilities and real estate. In fact, Morgan Stanley said last week’s rebound offers a good opportunity to sell and position more defensively.

Read: Morgan Stanley’s Wilson Says This Is a Bear Market Rally to Sell

Here’s a look at what market breadth is telling investors about the trajectory of the U.S. stock market:

Breadth Thrusts Pop Up

Nearly 90% of stocks in the S&P 500 traded above their 10-day moving averages on Friday. Since 1982, the broad index has been higher over the next year in 35 out of the 36 times when more than 90% of its stocks trade above their 10-day moving averages, according to Ned Davis Research. The firm’s version of the Zweig Thrust Indicator, which occurs when the barometer rises from below 40% to above 61.5% in a 10-day period, hit that level on Friday for common stocks only.

Taking Stock of Volume

While stocks have started to advance, market technicians want to see the moves supported by volume rather than just a handful of companies pushing major indexes higher. The Arms Index, also called the Short-Term Trading Index, or TRIN, is an indicator that compares the number of advancing and declining stocks to advancing and declining volume.

Read: Waiting on Capitulation? Technicians Urge Patience: Taking Stock

Readings below 0.5 in the Arms Index suggest there is more demand for stocks, while readings above 2.0 are a sign that investors are dumping equities, according to Todd Sohn, managing director of technical strategy at Strategas. On March 2, it fell to 0.55, but on Friday it sat at 1.28, meaning another bout of selling may be on tap before the market has its final washout.

Momentum Signals

Less than a third of S&P 500 stocks are trading at 20-day highs, and that figure would need to expand beyond 50% for traders to believe momentum is improving, Sohn said. Strategists are also looking for the percentage of stocks trading above their 20-day moving average, which stood at 84% Friday, to climb above 90%.

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