Weekly Moving Average Crossovers Indicate Bull Market Resurgence

Market Trends Defying Bear Market Predictions

Despite ongoing debates about the potential for another bear market, weekly moving average crossovers are currently suggesting a different outcome. Numerous concerns are present, including geopolitical risk, still inverted yield curves, slowing economic growth, high interest rates, and inflation. However, markets are currently approaching all-time highs, despite these concerns.

Investor Behavior and Market Signals

While the allure of 5% money market yields is strong, it's often necessary for investors to distance themselves from the fear-inducing headlines. A common trait among investors is the tendency to avoid loss, which can sometimes lead to an overly cautious approach. While this may alleviate short-term emotional concerns, it can result in significant long-term wealth impairment. It's often more beneficial to focus on what the market is communicating. The stock market has a history of leading the economy by 6-9 months. This can be illustrated by examining the chart of the S&P 500 index and paying attention to the blue dots, which represent stock market peaks.

Understanding Market Peaks and Economic Growth Rates

The blue dots in the S&P 500 chart represent the market peaks before the onset of a recession. Interestingly, the S&P 500 peaked and turned lower in nine out of ten instances before a recession was recognized, occurring anywhere from 6 to 16 months later. The key takeaway is that the stock market was signaling a coming recession months ahead of the economic data reflecting it. The only exception was in 1980 when the stock market and economic data coincided in the same month. The challenge for investors is to wait for the data to catch up.

Utilizing Moving Average Signals

Recognizing that the market often leads the economy by six months or more, we can use longer-term market signals to help navigate the risk of a recessionary downturn. A weekly risk range report in the Bull Bear Report has been produced for several years. This report includes several measures of analysis, including the relative performance of each sector and market to the S&P 500 index, and the moving average crossover, determined by the short-term weekly moving average crossing positively or negatively with the long-term weekly moving average. Currently, every major market and sector, except for the U.S. dollar, is on a bullish moving average crossover. This weekly data is slower to move, which tends to provide better signals for both increasing and reducing portfolio risk.

Assessing the Effectiveness of Moving Average Signals

But how effective are these signals in protecting against the onset of a recession or a more protracted market downturn like the one experienced in 2022? The chart using a simple weekly moving average crossover analysis indicates that investors should consider increasing or reducing risk to equity exposure. In 2000 and 2008, the moving average crossover signal warned investors that a recessionary onset was coming 9 and 12 months ahead of actual recognition. The weekly moving average signals also triggered a sell signal in early 2022 ahead of the ~20% decline, although a recession has not been recognized yet. It's worth noting that these signals are not always perfect, as seen in 2020 during the pandemic shutdown when the signals to reduce and increase exposure coincided with the market. However, over the long term, these moving average signals can provide investors with a valuable roadmap to follow.

Positive Indications from Bullish Buy Signals

Returning to the risk range report, a review of late 2021 warned readers that market deterioration was increasing. The report showed that almost every sector and market had bearish moving average sell signals triggered. At the time, media headlines were filled with negative predictions, including the "death of the dollar," recession warnings, and bear market alerts. However, such negative extremes often coincide with market bottoms. As we now know, October 2022 marked the bottom of the market, and the recession predictions have since faded. The market has since recovered, and those bearish moving average sell signals have reversed to bullish buy signals. While the market is currently overbought, and a consolidation or correction is likely, with every major equity and bond market on bullish buy signals, the market is not predicting the onset of a recession.

Market Corrections as Opportunities

Does this mean that markets will be free of any short-term corrections? Not at all. We just experienced a 5.5% correction in April. Moreover, corrections during market advances happen every year and tend to be opportunities to increase equity exposure as needed. While unexpected events could send markets into a tailspin, the market has a long history of anticipating recessionary onsets well before economists and the mainstream media recognize them. With numerous commentators pointing at every piece of data as an indicator of economic doom to garner more clicks and views, it's advisable to sit back and pay attention to the markets. The signals the market provides tend to be a more reliable signal to follow. When those bullish weekly moving average buy signals begin to reverse, we will know it's time to become increasingly more conscious of risk. As of now, the market suggests that sitting in cash may be a mistake when it comes to reaching retirement goals.

In conclusion, it's clear that the market signals are currently indicating a bullish trend, despite the various economic concerns. It's a reminder that focusing on market signals, rather than fear-inducing headlines, can often provide a more accurate picture of the economic landscape. What are your thoughts on this analysis? Do you agree with the bullish indications? Share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.