The rally in stocks since October 2022 is one of the weakest bull markets on record, according to Ned Davis Research.Elevated valuations and monetary tightening measures from the Federal Reserve have limited upside potential. These technical signals highlight just how weake the current rally in stocks really is, according to NDR. Loading Something is loading.
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The current rally in stocks that began in October 2022 and led to a more than 30% rally in the S&P 500 at its peak is one of the weakest bull markets on record, according to Ned Davis Research.
The investment firm highlighted last month that the rally in stocks is the third weakest start to a new bull market since 1950, and for good reason.
NDR’s Ned Davis said in a Monday note that elevated valuations and ongoing monetary tightening policies from the Federal Reserve have limited the potential upside in the stock market.
Even though NDR remains overweight stocks, especially as the market enters a favorable period of seasonal bias heading into year-end, there are still plenty of reasons why investors should remain cautious.
These internal signals of the stock market highlight just how weak the current bull rally in stocks has been, according to NDR.
1. Price-to-sales ratio is highThe S&P 500’s price-to-sales ratio is still too high as it treads above its dot-com bubble peak in 2000. That suggests to Ned Davis that the stock market is expensive.
“The market remains overvalued. While valuations are not good short-term indicators, in the long run, value matters,” Davis said.
Ned Davis Research 2. Demand for stocks is weakTypically when a bear market in stocks ends, demand for stocks soars, as measured by trading volumes. Ned Davis measures the difference between volume demand and supply, which often flashes a buy signal and surges to +5 or higher in the early innings of a new bull market.
“It did not do that in this bull market, showing poor underlying demand, and then it gave a sell signal on August 17,” Ned Davis said.
Ned Davis Research 3. Key breadth signal never flashedBreadth is a key measure of how many stocks are participating in the upside of a market rally, and it’s currently low relative to other bull markets in history.
“We did get breadth thrusts early in this bull market, but a buy from the percentage of stocks above their 50-day moving averages never happened. It also failed after 1987, but a ‘failure to launch’ here in a bull market is very rare,” Ned Davis said.
Ned Davis Research 4. Narrow stock rally driven by mega-capsThe year-to-date returns of the S&P 500 are flat if you remove the top eight mega-cap tech stocks, including Amazon, Apple, Alphabet, and Nvidia, among others. The other 492 stocks in the S&P 500 have been mostly flat, according to the note. That’s not what usually happens during a new bull market.
“Bull market leadership has often been concentrated in various areas, but given the other evidence today that the average stock refuses to confirm, I must respect this,” Ned Davis said.
Ned Davis Research 5. The advance-decline lineThe advance-decline line is another measurement of stock market breadth. It is calculated by measuring the difference between the number of rising and falling stocks on a daily basis.
“Finally, the chart at left shows the all markets daily advance-decline line at a new bear market low! As one can see, in the secular bull market since 2009, this is very much ‘out of character,’ something that makes me deliberate over the health of this market,” Ned Davis said.
Ned Davis Research