- A strong showing for US stocks in 2020 sets the stage for continued upside in the first half of 2021, according to a Sunday note from Bank of America.
- The bank highlights four technical indicators that are painting a bullish backdrop for stocks into next year, according to the note.
- Positive developments in trends, seasonality, sentiment, and breadth are pointing to further upside ahead for stocks, Bank of America said.
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Despite a rocky start to 2020 for stocks, the market has managed to claw back from its near 35% drawdown in late March and deliver year-to-date gains of nearly 15%, well above the average annual return of 8% for stocks dating back to 1928.
According to a weekend note from Bank of America, the strong showing in stocks and above average returns in 2020 bodes well for further gains in the first half of 2021.
With triangle breakouts in the S&P 500 generating a measured move price target of 3,830, investors should lean bullish into the new year, Bank of America said. A move to 3,830 would represent potential upside of 4% from Friday’s close and record all time highs for the index.
Here are four technical indicators that are pointing to a bullish start for stocks in 2021.
Trends
A bullish trading cycle is underway for stocks, as evidenced by rising 26-week and 40-week moving averages in the S&P 500, Bank of America said. But it's not just the S&P 500 index that is delivering a strong uptrend in price action.
The Nasdaq 100, equal weight Nasdaq, and global stock indices are exhibiting strong uptrends with positive price momentum and strong participation.
Meanwhile, volume indicators are confirming the uptrend in stocks.
"The cumulative net up volume line has finally broken out to the upside to confirm the 2020 rally on the S&P 500," Bank of America explained, adding that the same bullish volume breakout has occurred in the small-cap Russell 2000 index.
Seasonality
December is the month of the year most likely to generate a positive return for stocks, Bank of America highlighted. And if the stock market can post an above average annual return in 2020, which barring a steep year-end sell-off, it is on track to do, the first quarter of 2021 should also be positive for stocks, based on seasonality data, according to BofA.
"If the SPX can finish 2020 with an above average annual return, the seasonally positive month of January stays bullish. In addition, when the previous year has an above average annual return, 1Q in the following year tends to be stronger than average as well," BofA said.
The S&P 500 was up 71% of the time for the first quarter and delivered average returns of more than 2% when the stock market posted an above average return in the prior year.
Sentiment
"SPX futures positioning shows that large speculators and asset managers do not have aggressive net long positions. In our view, this means that large speculators and asset managers have the capacity for a catch-up trade to chase a rally into yearend and early 2021," BofA said.
On top of that, the net long positioning of asset managers is well below peak S&P 500 levels, according to BofA. So even as the stock market marches to new record highs, asset managers still have room to add exposure to stocks.
"This means that there is room for this sentiment and positioning indicator to run before hitting the overbought extremes associated with past peaks for the S&P 500," Bank of America said.
Breadth
More stocks are participating in the upside, rather than market being driven higher by a select few of mega-cap tech stocks which has been the case over recent years. The broader participation is evidenced by a breakout to new all-time highs for small-cap stocks, as well as a surge in the advance/decline indicator.
"A bullish breakout to new highs for the NYSE advance-decline line confirms a broad rally for US equities in 4Q 2020," BofA said.
The bank added that the breakout in new highs for the advance-decline line "contrasts the bearish divergence for the NYSE stocks A-D line, which suggested a narrowing market as the S&P 500 moved to higher highs just ahead of the COVID-19 correction," according to the note.
"The NYSE all issues A-D line remains within a solid uptrend," BofA said.
