The recent string of records in the U.S. stock market may just be the beginning.
When the S&P 500 SPX, +0.57% closed at an all-time high last Friday — the first in a four-day-long streak of records, as of Wednesday’s close — it not only represented a new peak for Wall Street, but the end of a lengthy stint of essentially sideways trading. And now that equities have broken out of the range they’ve been in for months, momentum may have shifted in a way that augurs for even more advances ahead.
“A breakout from a multi-month base is about as bullish of a signal as we usually get with the stock market,” said Andrew Adams, senior research associate at Raymond James, who particularly cited the robust 0.8% gain in Monday’s session.
“It’s hard to argue with a pattern like this. Ideally, the index does not retreat back down beneath its 2,872 breakout point, but even if it does, there should be plenty of additional support underneath now to prevent a significant downside move.”
Recent gains have been supported by a wave of positive economic data, including on consumer sentiment and gross domestic product, the latest read of which showed growth coming in at a 4.2% pace, slightly better than the initial reading of 4.1%.
Sentiment has also been boosted by an apparent easing of tensions between the U.S. and its major trading partners, after the U.S. and Mexico announced progress toward a bilateral trade agreement that may ultimately result in a retooling of the trilateral North American Free Trade Agreement.
Concerns that trade tensions could devolve into a full-blown trade war have been one of the primary factors holding back stocks for months. While the Dow Jones Industrial Average DJIA, +0.23% remains about 2% below its own record, it recently exited its longest stint in correction territory in nearly 60 years.
The months of essentially aimless trading — where major indexes churned between a record hit in late January and a 2018 low hit shortly thereafter — “built what should be a pretty powerful support base going forward,” Adams wrote.
“It is dangerous to ignore breakouts from such bases, as they typically signal something has changed in the market.”
Anecdotal data does suggest brighter views toward the market. According to the latest survey of investor sentiment by the American Association of Individual Investors, 43.5% of those polled describe themselves as bullish on the market, meaning they expect prices will be higher in six months. That’s a jump of 5 percentage points from the previous week, and it takes the ratio above its long-term average of 38.5%, as well as to its highest level since mid-June.
The number of investors describing themselves as bearish dropped 2.7 percentage points to 24.4%.
Adams noted that the recent records “could just be a false signal — the last hurrah for the bulls,” said this seemed unlikely. “A breakout to an all-time high is not typically viewed as a symptom of an unhealthy market,” he wrote.