The market just flashed three bullish signals for investors, Ned Davis Research said.
Strategists pointed to the 40-Day Trading Index, the Daily Momentum Model, & the number of 10:1 up days.
Those indicators suggest short-term upside for stocks, though valuations look stretched over the long haul.
The market just flashed a handful of bullish signals that suggest there's more upside coming for stocks, according to Ned Davis Research.
In a note on Monday, strategists at the research firm pointed to three positive signals that have flashed in the past week following a steep sell-off earlier in the month.
The first signal, the 40-Day Trading Index, flashes a bullish reading when "crowd trading extremes" suggest an upward move in stocks is the "path of least resistance." The indicator gave signs that stocks were oversold last week, which has historically been followed by gains in the market 60% of the time since 1981, NDR strategists said.
The second signal, the 10:1 up day, flashes when the number of advancing stocks outpaces the number of declining stocks by a 10:1 ratio. Stocks notched their eighth 10:1 up day since last November in August, strategists said, a pattern "consistent with above-average returns" for the next 6 months."
The third signal, the firm's Daily Momentum Model, flashes a bullish reading when at least 65.5% of the firm's 94 indicators of short-term momentum turn positive. The model measured at 68.6% last Friday, a level that has typically led to an average yearly gain of 10% since 1979.
Those short-term indicators seem to have "confirmed the bullish message" in stocks, strategists added, noting that other measures of market breadth "have generally been unfazed by the recent pullback" in stocks.
Still, the firm cautioned investors on the longer-term outlook for equities. Valuations still look "stretched to the upside," the note said — in-line with other market commentators, who have warned that an AI-fueled bubble could be making the largest stocks on the market overvalued.
One valuation metric suggests that the market is the most overvalued since 1929, according to elite investor John Hussman.
"On a more cautious note, the selloff has done little to relieve the overextended long-term trend and valuations," NDR strategists said. "While the market can overshoot, like in 2000, the chart suggests both the long-term trend and valuations remain stretched to the upside."
Investors are generally positive on the outlook for stocks, despite a brief spike in recession fears. 43% of investors said they felt bullish on stocks for the next six months, according to the AAII's latest investor Sentiment Survey, up from the prior week's reading of 41%.
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