A significant imbalance in volume points to a bullish outlook for stocks

Key points:

• Volume in advancing stocks on the NYSE outpaced volume in declining stocks by a ratio of 10/1
• Similar volume skews near a high produced a 93% win rate for the S&P 500 over the next six months
• Growth-oriented sectors tended to outperform other groups, and the S&P 500

A volume-based indicator suggests the uptrend could persist

Over the last few weeks, the research team at Sentimentrader has highlighted numerous studies, all suggesting that the stock uptrend should resume.

The NYSE up-down volume ratio was the latest indicator to trigger an alert, surging above 10/1 on Friday. Our data shows a ratio exceeding this level on 207 occasions since 1950, when volume data became more reliable. However, context is essential. When I include a condition that requires the S&P 500 to close 1% or less from a 3-year high, the number of precedents drops to 15 other instances.

The previous lopsided skew in volume occurred in July 2021, during a steady uptrend, which produced a 7% gain in the S&P 500 over the ensuing six months.

A bullish skew in volume preceded positive returns 

Following precedents when the NYSE up-down volume ratio surpassed 10/1, with the S&P 500 less than 1% below a 3-year high, the world's most benchmarked index tended to maintain its upward bias, rising 93% of the time over the subsequent six months. Furthermore, the six-month time frame displayed significance relative to random returns. 

Over the next six months, the signal encountered a maximum loss exceeding -5% in 4 out of 15 cases, with no instance reaching a -10% loss, suggesting that a significant correction is less likely.

Growth-oriented sectors like Consumer Discretionary and Technology outpaced all other groups and the S&P 500 over the favorable six-month period.

Relative trend scores 

Among all sectors, only Technology exhibits a current relative trend score consistent with the historical outlook following comparable volume ratio signals.  

What the research tells us...

Price, breadth, and sentiment-based measures suggest stocks have turned the corner following a typical bull market correction. The latest indicator to add credence to the bullish backdrop is the NYSE up-down volume ratio, which surged above 10/1. Similar precedents led to a rise in the world's most benchmarked index over the subsequent six months in all but one case. However, it's improbable that the S&P 500 and other indexes will rise in a straight line. Events such as Nvidia's earnings, the next Fed meeting, and the upcoming election could introduce some turbulence along the way. For now, the weight of the evidence continues to favor a bullish stance.