This Signal Points To More Upside In Stocks

NEW MONTHLY SIGNALS

The MSCI World Index tracks over one thousand large and mid-cap stocks in twenty-two developed countries, covering 85% of the market capitalization in those regions. As shown via the chart below, a positive monthly MACD cross was just nailed down on the chart of the MSCI World Index, which speaks to improving perceptions of future economic outcomes outside of the United States.

Since the inception of the MSCI World Index, there have been five similar monthly MACD crosses. Subsequent S&P 500 performance was favorable in every case looking out one month to two years. The median S&P 500 gain one year after the previous signals was 19.42%.

SIMILAR SIGNAL IN THE UNITED STATES

The opening segment of this week’s stock market video covers a similar bullish signal completed at the end of November on the monthly chart of the Dow Jones Industrial Average. Unlike the limited data set of the MSCI World Index, the Dow allows us to see how the stock market performed following similar monthly signals dating back to 1948.

THE WEIGHT OF THE EVIDENCE

The signals covered above align with the signals covered on November 17 and November 24, telling us to keep an open mind about better than expected outcomes in the months ahead, while maintaining a healthy respect for normal volatility.

Stocks And A Window Of Opportunity

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Stock Performance Following Six Straight Weeks Of Gains In Q4

GLOOMY MANUFACTURING SURVEY FOLLOWED BY GAINS

In early October, a weak ISM Manufacturing Survey was followed by talk of an imminent recession. A factual analysis of similar drops in the manufacturing survey told us to keep an open mind about better than expected outcomes. The market responded with six consecutive weeks of gains (see chart below).

Given Q4 and Q1 offer some of the more favorable seasonal tailwinds, we wondered how stocks have performed in the past following a period of six consecutive weekly gains in the S&P 500. We looked for cases where the six-week streak began in the fourth quarter. As shown in the table below, stocks were higher one year later in 86% of the cases posting an average gain of 8%. Two and five years later, the S&P 500 was higher in every case. The yellow and red portions of the table remind us to have realistic expectations about normal volatility over the next three months.

MAJOR BOTTOM OR MAJOR TOP?

With many calling for stocks to peak soon, it is easy to forget the S&P 500 recently dropped almost 20%. Therefore, rather than assuming a major peak is coming soon, it is logical to ask:

Is there any factual basis to believe December 2018 marked a major stock market low?