Industry groups are surging, triggering several bullish alerts
Key points:
- More than 75% of sub-industry groups closed > 20% above their 1-year low
- When industries surge from a 1-year low, the outlook for stocks is excellent
- More than 56% of sub-industry groups closed > 5% above their 200-day average
- After similar thrusts above the 200-day, the S&P 500 showed exceptional upside consistency
Industry price trends continue to shift in favor of the bulls
Regarding the bull-bear debate, I prefer to let the data talk. And, right now, the bulls are winning the argument as just about everything I see is improving. i.e., it's more than just short covering driving the recovery.
One such indicator, the percentage of sub-industry groups closing > 20% above their respective 1-year low, surged above 75%. The recovery occurred after fewer than 10% closed 20% above their annual low.
An additional improvement in price trends occurred when more than 56% of sub-industry groups closed greater than 5% above their 200-day average. The improvement occurred after fewer than 1% of groups closed more than 5% above the average.
Similar surges from a 1-year low bode well for stocks
When 75% of sub-industry groups close greater than 20% above their respective 1-year low, the S&P 500 was higher at some point in the next year in every case since 1938. The signal experienced several whipsaw alerts during the 1929-32 bear market, which is not surprising given the volatility in that period.
A higher hurdle rate for the % of groups above the 200-day average
Usually, market analysts utilize the percentage of issues above the 200-day average to gauge long-term participation trends for a basket of securities. While it's an excellent indicator, I also like to look at the percentage of issues trading 5% above the 200-day. When securities surge above a higher hurdle rate, the trend change is more likely to be sustained rather than failing around the average.
Similar surges above the 200-day bode well for stocks
When 56% of sub-industry groups close greater than 5% above their 200-day average, the S&P 500 was higher at some point in the next year in all but one case. Consistency since 1949 is excellent, with no losses in the six or twelve-month windows.
What the research tells us...
Sub-industry groups, which incorporate small, medium, and large capitalization stocks, are improving no matter how one measures price trends. The broad recovery pushed the percentage of sub-industry groups closing > 20% above their respective 1-year low above 75%, a level associated with excellent long-term results for the S&P 500. And a majority of sub-industry groups surged more than 5% above their 200-day average, which suggests stocks are shifting to a potentially more sustainable long-term uptrend.