Tuesday, October 18, 2011

Two Bullish Stock Market Indicators

In recent weeks, I've thought that the weight of the evidence supported a rebound in stock prices.  Despite a significant rebound in the stock market already, two indicator updates this week support further gains for stocks.

An important reason for my optimism has been widespread pessimism among market participants.  Market lows occur at points of high levels of pessimism.  Though sentiment measures have risen somewhat, some key indicators still reflect pessimism (which would be bullish for stock prices).  One fairly new indicator is the National Association of Active Investment Managers survey of equity allocations.  The update this week showed the lowest allocation to equities since late 2008/early 2009, when the market bottomed.  When such low allocations have occurred over the last five years, the annualized return on the S & P 500 has been 38%.

Another indicator update that is bullish for stocks is a measure of market breadth.  The current internal characteristics of the stock market are currently bullish.  Going back to 1965, when market breadth has been this bullish, the annualized return on the S & P 500 has been 16%.

These updated indicators are consistent with my opinion that further moderate gains in stock prices are ahead.

Steve Lehman

S & P 500:  1225  

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