A Bull Market Health Check?

The Dent Research team got together two weeks ago for a quarterly planning session. Of course, we talked about the economy, the markets and how best to navigate these uncertain and volatile times.

We still believe that our long-term economic future looks grim, mostly due to the drag of declining demographics, deflation and ever-increasing geopolitical tensions.

But in the short term, and from a pragmatic standpoint, we’ve got to “make hay while the sun shines,” as they say.

And that’s what Cycle 9 Alert has always been about – finding high-probability profit opportunities that we can get into and out off within three months.

I recently shared with my Cycle 9 subscribers an interesting development that unfolded in February. It has major market implications for the next three months… so I thought it was best to share it with you, too!

You see, all major U.S. stock indices are hitting new highs!

All of them!

The Dow, the S&P 500, the small-cap Russell 2000, and even the Nasdaq 100, which made its second monthly close above its March 2000, Dot.com era peak.

The fact that all “flavors” of stock indices are hitting new highs together is a convincing sign of strength, suggesting the bull market is healthy and has legs to run higher… for at least a little while longer.

But I dug deeper to determine just who’s doing all the heavy lifting. Are the stock indices being pushed to new highs on the backs of just a few big-winner stocks? If so, it would shed suspicion on the rally and warrant caution ahead.

Or, are a majority of stocks – of all shades and flavors – equally benefitting from today’s confident and bullish buyers? Because if this is the case, it suggests the bull market has healthy breadth and should continue climbing higher.

I ran a simple study…

On a calendar month basis, I compared the number of U.S. stocks hitting new 52-week highs and the number hitting new 52-week lows.

In February, this ratio of new highs-to-lows was quite strong, at 10.8. That means for every one stock that made a new 52-week low in February, there were nearly 11 stocks that made a new 52-week high.

That’s bullish!

Looking at this ratio historically, the average ratio of new highs-to-lows comes in just a bit above four. Half of the months I sampled were under four, half were above four.

And to determine the predictive value of this metric, I analyzed the three-month forward returns of each group.

Here’s what I found…

As you can see, three-month forward stock returns are more likely, stronger, and less risky when the new highs-to-lows ratio is four or greater.

  • The win-rate improves from 64% to 75%…
  • The average three-month return improves from 0.4% to 2.6%…
  • And the risk of loss is lower, with the worst return improving from -30.1% to -14.3%.

This is great information!

This new highs-to-lows metric is sending us a message: “buyers are back” and they’re buying (nearly) everything.

February was the first month since September 2016 to print a ratio of 4-to-1 or greater… and the first time since July being over 10-to-1.

And my analysis shows that – thanks to the fact that buyers are bidding up a majority of individual stocks – the bull market is likely to stay strong and healthy for at least the next three months.

So even though our long-term forecasts for economic growth are grim, the sun continues to shine on U.S. equity markets, so make hay as long as you can.

The great thing about my Cycle 9 Alert system is we can be bold and bullish when everyone else is scared and conservative. That’s because our short holding period of two to three months allows us to stay nimble and adapt to changing conditions.

And whenever the inevitable crash does come, my Cycle 9 algorithm will automatically shift us into downside opportunities.

To good profits,

 

 

 

 

Adam O’Dell
Editor, Cycle 9 Alert
Follow me on Twitter @InvestWithAdam

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About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.