Stock market indicators are practically a dime a dozen. If you want indicators pointing to a market downturn, you can find them. And if you want ones that hint that a bull market is coming, you can find them, too.
Not all of these indicators have impressive track records for accurately predicting what the market will do. But there's at least one that has never been wrong. This stock market indicator is 20 for 20 since 1928. Here's what it says could be on the way.
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A key moving-average rally
A hat tip is in order to Bespoke Investment Group for noticing this particular indicator. Bespoke looked back at the history of the S&P 500 index. The company especially wanted to see what happened with the index after rallying from a new low.
The S&P 500 in its modern form with 500 companies didn't exist until 1957. However, its history goes back to 1923 when Standard Statistics Company (later Standard & Poor's and S&P Global) created an index containing 233 companies that it updated weekly. In 1926, a 90-stock index updated daily was introduced.
Bespoke examined every time that the S&P 500's 200-day moving average moved 1% higher after reaching a 52-week low since the creation of the daily index. This has happened 20 times since 1928. In every single case, the index was higher one year later.
A very bullish indicator
The biggest 12-month gain after the S&P 500's 200-day moving average rallied at least 1% above its 52-week low was the very first one. In 1933, the index skyrocketed more than 62% in the 12 months following its initial bounce.
In 13 of the 20 rallies, the S&P 500 increased by double-digit percentages over the next 12 months. The average gain in all 20 cases was 18.2% with a median gain of 14.4%.
Now for the good news. The S&P 500's 200-day moving average hit its 52-week low on March 28, 2023. Since then, the moving average is up more than 1%.
If history is any guide, stocks should perform pretty well over the next year or so. The S&P 500 is already up close to 10% so far in 2023. And while we've focused our discussion on this most heavily followed index, the Nasdaq Composite Index has begun a new bull market, soaring well over 20% year to date.
Two flies in the ointment
Should investors begin dancing in the streets? Maybe not. It's important to note two potential flies in the ointment that could bring the stock market indicator's impressive streak to a grinding halt.
First, the steep market sell-off last year was largely due to multiple interest rate hikes by the Federal Reserve. The rebound in 2023 has been in part a response to expectations that the Fed wouldn't raise rates much more, if at all.
However, inflation has remained persistently stubborn. The core personal consumption expenditures price index, an important inflation metric used by the Fed, rose in April. This increases the chances that at least one other rate hike is on the way, which could zap the market's momentum.
Second, many economists predict that the U.S. economy will enter a mild recession later this year. Even the Federal Reserve thinks this scenario is likely. While stocks don't always fall significantly during recessions, they often do.
Another perfect streak
There's another perfect streak that long-term investors should find especially encouraging. The S&P 500 has risen in every 20-year period in the history of the index. Because periods of exceptionally high inflation and recessions are relatively short-lived, this streak is unlikely to be broken.
