- The S&P 500's 14% rally since its mid-June low is looking more like the start of a new bull market than a bear market rally, according to Ned Davis Research.
- The investment research firm pointed to improving breadth and technical thrust indicators to back up its view.
- "The percentage of stocks at 21-day new highs has exceeded all previous bear market rallies," NDR said.
The current rally in the stock market is shaping up to be the start of a new bull market rather than another bear market rally that leads to new lows, according to a Tuesday note from Ned Davis Research.
NDR's view is fueled by its observation of several improving breadth indicators, which means that a broad swath of the stock market is participating in the S&P 500's 14% rally that started in mid-June.
That rally included a strong 9% surge in July, which represented the best July performance since 1939.
"More importantly, the rally triggered two breadth thrust signals on top of the double 10:1 up day from July 19. First, the percentage of stocks hitting 20-day new highs climbed above 55% for the first time since June 2020. Second, the ratio of 10-day advances to 10-day declines rose above 1.9 for the first time since February 2021," NDR said.
The breadth thrust indicator tracks momentum in the stock market. The "thrust" occurs when a high percentage of stocks rally together, and NDR monitors when 90% of stocks climb above the 10-day moving average.
Those strong moves suggest momentum is building across various sectors in the stock market, and it's why NDR increased their equity allocation by 5% to 55% and lowered their cash allocation to just 10% in their balanced account recommendation.
"The NDR weight-of-the-evidence approach of following indicators and models dictates that we recognize the improving environment," NDR said.
And there could be more upside to NDR's equity allocation if the economy continues to show signs of resilience as the Fed seeks to tame inflation.
"Should economic conditions improve, we would expect longterm bond yields to rise, and future additions to equity exposure would be more likely to come from bonds than cash," NDR said.
If the stock market continues its run higher and defies skeptics worried about a bear market rally, it would be third times a charm, as bear market rallies in March and May ultimately failed and led to new lows in the market.
The difference between today's rally and those rallies is that while two other breadth thrust signals fired in March and May, "each of the three indicators that fired in July did not earlier in 2022," NDR said. That's "a change worth noting."
Ultimately, the technical indicators are pointing to the idea that the current rally in stocks will continue as the bear market rally is over.
"The percentage of stocks at 21-day new highs, [the] percentage of stocks at 63-day new highs, and the percentage of stocks above their 50-day moving averages, are higher than not only bear market rally medians, but the new bull market medians as well," NDR said.