What is the stock market going to do next? Will there be a new bull market? That is the question that every investor wishes they could answer accurately. Regrettably, there is no way to predict how stocks will perform. Is there one?
Many investors like to look at indicators that have proven to be trustworthy in the past to get a sense of which way the market might move. Since 1960, one indicator has predicted every bull market. Here’s what the market is predicting for equities right now.
Indication of a new bull market?
This particular indicator does not have a catchy name. That is, nevertheless, simple to grasp.
The first requirement for using the indicator is that the S&P 500 has fallen by at least 20%. We can cross that one off the list. The index has dropped by more than 25% since its previous high in mid-October of last year.
After that, we must consider the S&P 500’s 10-month moving average. This moving average represents the index’s average closing price over the previous ten months. When the S&P 500 closes above its 10-month moving average for two consecutive months, the indication indicates that a bear market is ending and a new bull market is beginning.
That’s exactly what happened in the first two months of 2023 for the major index. In January, the S&P 500 easily closed above its 10-day moving average, indicating that a nice bounce is beginning. Its momentum slowed slightly in February. The S&P 500, on the other hand, just needed to close over 3,947 for the indicator to signify a new bull market. It concluded the month with a total of 3,970.
A proven track record
Since 1960, the S&P 500 has finished above its 10-month moving average 14 times in a row after the index plummeted by at least 20%. In each case, the indicator properly predicted the start of a new bull market.
Moving-average indicators tend to lag behind market momentum. This is true for this indication. The longest bull market in history, for example, began in March 2009. Yet, the S&P 500 didn’t close above the 10-month moving average for two months in a row until July 2009.
In the most recent bull market, it was a similar situation. The S&P 500 crashed in February 2020 as a result of COVID-19 fear. A new bull market began the next month. The index, however, did not close two months above its 10-month moving average until June 2020.
We can’t really say that this signal always predicts a bull market because of the delayed influence. It does, however, have a good track record of verifying that the S&P 500 is in a fresh bull market.
Indicator collision
Is a fresh bull market therefore unavoidable? No, not always. In fact, there appears to be a significant clash of historically dependable signs.
For example, in all 12 bear markets since World War II, the market did not bottom out until the National Bureau of Economic Research declared a recession. Thus far, no recession has been proclaimed. This indication hasn’t been inaccurate in 77 years, which is an even better track record than the one we’ve already covered.
Another reliable bear market indicator that has never been inaccurate. When the Shiller cyclically adjusted price-to-earnings (CAPE) ratio exceeded 30, it predicted major market collapses dating back to 1870. To be sure, the signal did not predict every bear market. But every time it flashed, a bear market followed.
Yet, no indicator is completely reliable. Perhaps the S&P 500 will begin a fresh bull market; perhaps it will not. What investors can be certain of is that the stock market has always given good returns over a 20-year period and virtually always does so over a five-year period. Long-term investors don’t need to look at any signal to be confident in their chances of attaining positive returns.
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