By Graham Summers, MBA | Chief Market Strategist
A raging debate is taking place between the bulls and the bears.
That debate?
Whether the lows are in… or if stocks are about to roll over and retest the lows or even break down the new lows.
Unfortunately for the bears, or anyone else who has missed the rally thus far, history and multiple metrics point to THE lows being in.
First and foremost, the S&P 500 completed a nine-session win streak two Fridays ago. The financial media likes to claim that this kind of win streak only occurs in the context of recessions, but that is simply not true.
As Ryan Detrick has noted, since 1928 there have been 29 instances in which stocks closed up nine days in a row. Only THREE of them occurred in the context of recessions. So, the odds greatly favor recent price action being bullish, NOT bearish.
Secondly, the month of April saw an incredible swing in prices that ended with a VERY bullish development. At their lowest, stocks were down over 11% for the month. However, because of the incredible rally into month-end, the S&P 500 ended April only down 1%.
This massive swing in momentum from being sharply down to sharply up triggered a Zweig Breadth Thrust (ZBT), an EXTREMELY rare and EXTREMELY bullish development.
If you’re unfamiliar with ZBTs, one is triggered when the percentage of advancing stocks on the New York Stock Exchange (NYSE) increases from below 40% to above 61.5% within 10 trading days.
There have only been 16 ZBT signals since 1957. Every single time, the stock market has been higher both six and 12 months later. Here again, this strongly suggests THE lows are in and a major bear market is not about to unfold.
We also must consider sentiment.
According to the American Association of Individual Investors (AAII) weekly survey, more than 50% of investors were bearish on stocks for 11 weeks straight up until this week. That is HIGHLY unusual as historically an average of only 31% of investors are bearish at any given time.
Indeed, 11 straight weeks of more than half of investors being bearish on stocks is an EXTREME reading. Since its inception in 1987, the AAII weekly survey has never seen such an extreme streak of bearishness. Not during the Tech Crash, not during the Great Financial Crisis, and not even during the pandemic has this great a percentage of investors been bearish on stocks for this long.
This is the kind of sentiment you see at major market bottoms, NOT at the start of new bear markets. So here again, the odds greatly favor that THE lows are in, and stocks will move higher.
Finally, peak to trough, stocks declined 18.9% from the February highs. This is what you would call a “bear market” or “near bear market” (Wall Street views a bear market as being a 20% decline).
As I write this, the S&P 500 has recovered more than HALF of that decline. Since 1956 there have been 16 instances during which stocks staged a bear or near bear market decline and then recovered half of the drop. In only one instance did stocks make new lows after recovering half of the initial decline. But in EVERY instance, stocks were higher a year later. (h/t Ryan Detrick). And not by a little, by an average of 18%!
Add it all up, and you’ve got:
- A nine-day win streak: a rare and historically bullish signal (89% of the time).
- A Zweig Breadth Thrust (ZBT) which has a 100% track record for stocks being higher six and 12 months later.
- The kind of extreme bearish sentiment typically associated with major bottoms, not the start of new bear markets.
- Stocks recovering half of a bear/near bear market decline, which has a 100% track record for stocks being higher a year later with an average gain of 18%.
Like I said at the start of this article, it is HIGHLY likely that THE lows are in. This is not to say that stocks will go straight up from here, but that the overall trend is now UP.
And while stocks should do well in general, certain companies will produce extraordinary gains due to their being A) high growth and B) unaffected by the trade war/ increased tariffs.
We detail four such companies in a Special Investment Report Tariff Proof Stocks: four high growth companies unaffected by the trade war.
As I write this ALL FOUR of them just hit new all-time highs.
Normally this report is only available to our paying clients, but in light of what’s happening in the markets today, we are making just 99 copies available to the general public.
To pick up one of the remaining copies…
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
