Market Technicals Still Bullish

07/31/2014 9:00 am EST

Focus: STOCKS

James Stack

President, Stack Financial Management

The blue chip market indexes have marched steadily higher over the past three months, despite the annual admonitions from “Sell in May” advocates, observes Jim Stack, editor of InvesTech Market Analyst.

On an equally positive note, economic data has also strengthened since early this year and our technical indicators remain bullish. Let’s look at where these technical gauges currently stand and how this scenario has historically played out over the next 12 months.

  • Our Negative Leadership Composite (NLC) is showing an increasing bullish “Selling Vacuum” which has risen quickly, indicating that defensive selling pressure is drying up.
  • This bullish “Selling Vacuum” in our NLC is near the critical +20 threshold which, if it breaks through, has strong positive implications for the months ahead.
  • Breadth and our InvesTech Bellwether Index have broken out to new highs, confirming that the bull market is still intact.

The “Selling Vacuum” in our Negative Leadership Composite is close to +20. It has passed this key threshold only 35 times in the past 52 years.

Historically, a move above this level has provided a positive outlook. In more than 80% of the instances, the S&P 500 continued to move higher over the next six- and 12-month periods following a breakout. In fact, 69% of the cases saw the Index gain more than 10% over the ensuing 12 months.

That doesn’t rule out a bear market, but it may help mitigate early losses. Five of the last eight bear markets started within 12 months of this bullish signal.

The positive outlook evidenced by the Negative Leadership Composite is also confirmed by our leading technical indicators. As shown here, breadth continues to strengthen with the A/D Line climbing to new highs in July along with the blue chip indexes.

Likewise, our Bellwether Index has also broken out to new highs and is again moving upward following a brief hesitation this spring. Historically, both indicators have peaked ahead of the stock market and there are no developing warning flags or signs of divergences at this time.

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