Why the Stock Market is Headed Much Higher From Here: And Why Now is the Right Time to Buy

Here at Cabot, we’re big believers in stock market timing—our core trend-following indicators help us avoid every major decline and stay heavily invested for every sustained rally in stocks.  That’s why we were on the sideline when Lehman went belly-up in 2008, turned bullish in late-March 2009 and navigated the bull market in the years that followed.  Today, happily, our intermediate- and longer-term trend measures are bullish, so I’m optimistic further gains are likely. 

But today I’m writing about one unique subset of indicators I track.  These indicators don’t speak often … but when they do, they have a history of pointing to healthy gains in the months ahead. And a bunch of them are speaking now!

I call these “blastoff” indicators, and they spot rare displays of market power in terms of breadth or trading volume.  Buy signals from a blastoff indicator tell you there’s been a sudden, dramatic change for the better in investor perception—and that positive change almost always persists for many months after the signal, leading to higher prices in the market despite what many believe is an “overbought” condition.

Because of a few factors (decimalization, program trading, etc.), these blastoff signals have flashed more often in recent years than in the past, but they remain relatively rare. But not this year! While you typically might not see any blastoff signals for five or even 10 years, there have been numerous unusual signs of strength since this year’s February stock market low.

First came the S&P blastoff measure. In mid-March, more than 90% of all S&P 500 stocks rose above their respective 50-day moving averages. Combined with the fact that the S&P 500 was below its 200-day line during the prior three months, that’s only happened nine times during the past quarter century. Following those instances, the index was up an average of 11% six months later, and up 16% a year later.

In April, there was a related but broader signal—90% of all NYSE stocks closed above their respective 50-day lines. According to The Chartist, such a signal has occurred just 10 times in the past 35 years. Six months after these signals, the S&P was up an average of 14.5%.

Then, following the sharp two-day Brexit selloff in late June, a volume-related indicator flashed. As the stock market snapped back, we saw two straight days where more than 90% of the volume traded on the NYSE flow to stocks that closed higher on the day. Having back-to-back “90% days” when the S&P closes above its long-term 200-day line is extremely rare—it’s only happened three other times since 1965! Following those instances, the S&P rose as much as 20.7%, 33.7%, and 26.4% during the following year!

And then on July 12, we saw yet another green light, this one involving the advance-decline line. Over the prior 10 trading days, advancing stocks on the NYSE outnumbered declining stocks by more than 2-to-1. That’s only happened 10 other times since 1960 (including just five times since 1980; the last signal was in March 2009). On average, the S&P 500 rose as much as 11% three months later, 15% six months later and 22% a year later.

Remember, too, all of these results are just for the S&P 500—faster-moving indexes like the Nasdaq generally did even better, never mind leading stocks and sectors, which can do spectacularly in a sustained uptrend. Those leading stocks, by the way, are the kinds of names our various Cabot advisories focus on, including the two advisories I’ve been running for more than a decade: Cabot Growth Investor and Cabot Top Ten Trader.

To be clear, blastoff indicators are most reliable when looking out three to 12 months; nothing precludes the S&P 500 from pulling back and consolidating, especially with earnings season just getting underway. 

But when you combine all of these blastoff signals with the S&P 500’s breakout of its 18-month trading range and apathetic investor sentiment (during the past 18 months, $175 billion has flowed out of domestic equity funds while $130 billion has flowed into bond fund and ETFs!), there’s only one conclusion: The odds strongly favor higher prices for the stock market in the months ahead—possibly much higher as a sustained uptrend attracts more and more investors back to stocks.

“Chart”

We’re getting fully invested in Cabot Growth Investor and recently added three additional fast-growing stocks to our portfolio. If you join today, we can help you profit from the market’s strongest stocks. Now is not the time to sit on the sidelines. Get more information about Cabot Growth Investor here

In Cabot Top Ten Trader, another publication that I write, our readers were able to grab many double and triple-digit winners year to date, and we continue featuring many of the momentum stocks under accumulation each week. To get more information on the advisory, click here

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