Signs of market strength cheer US stocks bulls

US stock bulls are taking heart from a range of market signals pointing to an upbeat year for Wall Street, as equities sit on impressive gains despite worries that the Federal Reserve’s monetary policy tightening may plunge the economy into a recession.

Among these are equities’ positive January performance, a “golden cross” chart pattern on the S&P 500 and more stocks making new highs rather than new lows.

Such signals are far from the only indicators market participants use to make investment decisions, and they are not foolproof. Weak outlooks for corporate heavyweights such as Amazon and Microsoft and a blowout employment number that heightened expectations for Fed hawkishness injected a fresh note of uncertainty into markets on Friday, though the S&P 500 remains up 7.7 per cent year-to-date.

However, steady improvements in gauges of momentum and sentiment in recent weeks reinforced the view among some investors that asset prices may be heading for a more benign period, after last year saw the S&P 500 lose 19.4 per cent in its biggest annual percentage drop since 2008.

“We think this is a healthy picture that is being painted here,” said Ryan Detrick, chief market strategist at the Carson Group, referring to signals such as January’s gains and the broad range of sectors participating in the rally.

January jump

The S&P 500 rose 6.2 per cent in January, driven in part by hopes that the Fed will be able to contain surging inflation without badly damaging the economy.

When the S&P 500 has advanced in January, the market has gone on to rise in the subsequent February-December period 83 per cent of the time, with an average 11-month gain of over 11 per cent, according to an analysis of data going back to World War II by CFRA Research.

An up January after a down year, however, was followed by a gain of 23.1 per cent from February to December with a 92 per cent success rate.

Despite a recent rally that may have made stocks comparatively expensive, “the track record implies that maybe we do have some upside potential,” said Sam Stovall, chief investment strategist at CFRA Research.

Golden cross

Meanwhile, chart watchers noted that the S&P 500’s 50-day moving average rose above its 200-day moving average on Thursday, a pattern known as a golden cross.

“The January employment report was unambiguously strong and should be the start of a series of data points showing stronger activity and inflation in early 2023,” analysts at Citi wrote. “We expect this emerging trend should push back on too-dovish market pricing.”