Three patterns are setting up the stock market for a breakout rally, according to Jeffrey Saut, chief investment strategist at Raymond James
In a note on Tuesday, Saut briefed clients on one historical trend and two observations from technical analysis that indicate the S&P 500 could be set to reach a new record again.
In horse racing, a trifecta is a bet that nails the order of the first, second and third finishers.
“Nobody can consistently ‘time’ the various markets,” Saut cautioned.
“Yet if one ‘listens’ to the message of the markets, you can certainly decide if you want to be playing hard, or not so hard. We have been playing pretty hard since our model targeted the mid-February lows.”
Here they are:
- An all-time high after a dry spell is usually good for stocks. In July, the S&P 500 clinched a fresh high for the first time since May 2015. Every other time that the index reached new highs at least 52 weeks after the old record, the average return in the following 12 months was 12.28%, Saut noted.
- The Coppock Curve, which measures how fast the S&P 500 is currently rising compared to 11 and 14 months ago, shows that it’s a good time to buy. This is because the curve has moved from a negative to a positive position, meaning the S&P 500 is at a turning point on a longer-term basis.
- The Bollinger Bands have shrunk to one of the narrowest readings in decades. The bands are constructed two standard deviations from a 21-day moving average, up and down. Traders view a tightening of the bands as a sign that volatility is about to increase. In the six times that they have narrowed since 1960, S&P 500 returns have been “significant” over the following year, Saut said.
The benchmark S&P 500 jumped to an all-time high on Monday together with the tech-heavy Nasdaq. It was one of several new highs the market reached in recent weeks.
But it’s been a slow crawl higher in a very tight range. Monday marked the 26th straight day that the S&P 500 did not rally or fall by more than 1%.
“It is worth noting that, following tight trading ranges, like what has happened over the past few years, these “quiet periods” have almost always been followed by significant rallies,” Saut wrote.