Over the past few months, two of our most reliable momentum indicators have turned positive, confirming our June 2nd Chartist Long Term Buy Signal. First, the Chartist 90% Rule flashed a buy signal on April 19th. The Advance/Decline Ratio followed as it triggered a positive reading on July 12th. Both signals are very rare and indicate strong momentum behind the market as you can see from the chart on page 2 of the Breakout of the S&P 500 to all-time Highs. Historically, the market has moved substantially higher after a buy signal from these indicators.
MarketWatch columnist Mark Hulbert wrote about the Chartist Advance/Decline Ratio in a recent article dated July 15th: Click here to read
The table summarizes the results of past signals for the 90% Rule. A buy is triggered whenever 90% or more of the stocks on the NYSE rise above their respective 50-day moving averages. The occurrence signifies that market momentum is strong enough to propel it higher for several months or more. Since 1970, there have only been ten previous signals, with the last one taking place on October 13th, 2010. The S&P 500 gained 8.2%, 14.6% and 16.5% over the following three, six, and nine month time frames without a single negative period.
On top of the Chartist 90% Rule, our Advance/Decline Ratio has also triggered a positive reading. The ratio, often referred to as an overbought/oversold indicator, is a ten-day simple average of advancing stocks versus declining stocks. A signal occurs when the ratio rises to a 2 to 1 margin or more. Since 1949, there have been only thirteen previous signals (see Table).
The last buy signal took place more than seven years ago on March 23rd, 2009. The Dow’s average gain over the ensuing three, six, and twelve months was: 7.9%, 15.7%, and 20.2%. The only loss for the indicator after twelve months was a 5.8% decline following the 1987 signal.