With stocks setting one new high after another and the S&P overbought at 8 ½ percent above its 200-day moving average – amid a back drop of only modest economic growth and myriad looming problems such as the fast approaching March 1 Sequestration deadline – it pays to look market indicators that can give you an unbiased view of what’s coming down the pike.
And believe it or not, quite a few indictors are giving stocks the green light, signaling further gains are in store. The best markets are those in which the small cap shares are out in front leading the advance. One proprietary indicator we use examines the broad market by combing two measures of small cap performance, the unweighted average of all stocks on the NYSE and the advance/decline line, while taking into consideration standard deviations of the pair.
Right now, with the broad market acting as well as it has in recent months, this indicator is flashing a buy signal that has an 800 percent batting average in generating not only positive returns in the subsequent 3- and 6-month periods, but above-average returns, especially for the small cap shares but for blue chips as well.
Another indicator that agrees in the High/Low Logic Index. Put simply, the paltry number of stocks hitting new 52-week lows right now is typically associated with markets that are positioned for strong advances. Moreover, it would be highly unusual for stocks to undergo a sizable correction before this indicator worsens. That might happen of a period of months, but for now all systems are go.
That said, and here’s where our emotions come into play, we admit that we’re a bit doubtful that blue chip stocks can punch through their record highs set in 2007 on the first try. We’re little more than 2 percent away now for the S&P 500. But we remain optimistic and we’ll see how things play out. And if the indicators start to deteriorate, we’ll certainly let you know.