We’re seven months into a new U.S. bull market, and weakness is to be bought. That’s the key takeaway from three veteran technical analysis (TA) experts who recently shared their market outlooks at the 50th annual Chartered Market Technicians (CMT) Association in New York City.
This is the group founded by TA icon Ralph Acampora to credential technical analysts so that they could be licensed by regulators to work in the investing industry alongside other licensed experts like certified financial accountants.
The meeting was one of the most interesting market conferences I’ve been to in years. The best in the business shared their techniques, outlooks and market wisdom earned over decades. Besides Acompora, presenters included Ned Davis and members of his Ned Davis Research team, and trading legend Larry Williams.
I share their bullish outlook on stocks. But first, here’s one of the most interesting conference takeaways. While these three TA experts were bullish, attendees on the whole were cautious. To me, this sets up a “smart money” vs the crowd dynamic. In this scenario, it can pay to make a contrarian bet against the crowd.
In an app-based poll of attendees, the vast majority, or 66%, predicted the U.S. stock market will have moved down or sideways by the end of year. Similarly, 68% said to own defensive cash or consumer staples for next three months. Only 32% said to own consumer discretionary, a group that typically outperforms in bull markets. The majority of attendees also predicted gold
GC00,
will trade up to $2,500 by the end of the year, another expression of caution about the U.S. economy and the stock market.
I’ve been suggesting bullish contrarian bets against the crowd in this column and my stock letter. So, it was reassuring to hear that veteran TA experts Acampora, Davis and Williams share my constructive outlook on stocks.
Read: 5 sentiment indicators are telling us it’s time to buy stocks, especially this one group
Let’s take a closer look at why these TA experts are bullish.
The key reversal is key
One of the classic market patterns TA experts look for is the “key reversal” day. Also known as an engulfing pattern, this is when a day’s trading range engulfs the prior day range. If the index or stock closes above the prior day’s range, this is bullish.
I think of this as a visualization of the final bloody battle between bulls and bears, in which the bulls win, in the example above.
That’s what happened with the Dow Jones Industrial Average
DJIA,
last October 13. The Dow’s 28,755-30,168 range engulfed the prior day’s 29,233-29,455 range, and closed above it, at 30,038. “October 13 was the biggest outside day you have ever seen in your life,” said Acampora. “That to me was the [market] bottom. I have seen some bottoms, and that one really smacked me in the face.”
Since then, other technical factors confirm we are in a bull market, says Acampora, who famously predicted Dow 7,000 in June 1995 when the index was in the 4,000 range. The Dow hit his target, and then he upped it to Dow 10,000, which it also hit. Those calls helped put Acampora on the map as a TA market guru during the late 1990s.
A confirming bullish factor now is that since the Oct. 13 outside key reversal day, we have seen lots of shakeouts in the Dow, but each time the market has recovered enough to conclude that the uptrend is in place, in Acampora’s view.
“Every time the market gets shot down it has held up very well,” Acampora said in an interview after the conference. Acampora also cites the leadership of high-quality tech names like Nvidia NVDA
NVDA,
Microsoft
MSFT,
and Apple
AAPL,
as a bullish indicator.
Because financials have lagged by so much, Acampora said the group is a potential contrarian buy. I concur, based on the strong insider buying in the group — one of the strongest sector-buy signals I have ever seen in two decades of tracking insider actvity every day.
A long-term trend is your friend
Trader Larry Williams likes to take market positions based on his interpretation of market cycles. Right now, a dominant cycle supports stock strength through 2025, he believes. Identified by Edgar Lawrence Smith in his 1930s book, “Tides in the Affairs of Men: An Approach to the Appraisal of Economic Change,” this is a 42-month market cycle that has played out for 150 years. This cycle turned positive last summer. It says stay positive until 2025.
Williams thinks several other market cycles support a bullish view now, including the presidential election-year stock market cycle. This cycle sees market strength leading up to an election, presumably because incumbent politicians hand out economic favors and juice the economy to win votes. “Put them all together with the long-term cycle, and it is clear to me that that market is going to go up. We are in a bull market, and you should buy pullbacks. It is that simple,” Williams said in an interview after the conference.
Williams also considers fundamentals when making market calls. “You need the conditions to support a cyclical rally,” he says. Williams sees the right conditions in sharply declining inflation, the strong jobs market and indicators of strong business conditions.
The bullish ‘fusion analysis’ signal
This blended technique to gauge the market is called fusion analysis, which was a major theme at the CMT Association Symposium. Fusion analysis overlays traditional economic fundamentals on top of traditional TA. Fusion analysis helps explain why veteran market analyst Ned Davis, who has 55 years of experience in the business, told the TA symposium that his firm, Ned Davis Research (NDR), is now overweight stocks. It was defensive most of last year.
Here are some highlights on NDR’s market call. On the technical side, NDR tracks a combination of market internals to compile a group of “rally watch indicators.” When more than 50% of them turn bullish, that’s a buy signal. This happened last November 15, and the buy signal this kicked out remains valid today. Out of the 21 times this has happened since 2013, seventeen of them have been accurate signals of market rallies ahead. The ensuing market rally has posted a median 21.4% gain in up moves that last a median of 335 days.
Like Acampora, NDR cites tech strength as a good indicator confirming that we are in a secular bull market. Another bullish factor: the NDR crowd sentiment poll shows enough negativity to be bullish, in the contrarian sense.
These technical factors are supplanted by bullish fundamental signals. For example, NDR publishes a global recession-watch report that tracks 11 economic indicators. These include global manufacturing purchasing manager’s indices, leading economic indicators and measures of global trade volumes. “A few are negative, but the weight of the evidence is telling us we are not in severe global recession territory,” NDR chief economist Alejandra Grindal said.
This is key, because in moderate recessions, market pullbacks are narrower and shorter. In severe recessions, market pullbacks are deep and long. If investors face a moderate global recession, all the bad news may already be priced in by the market declines behind us. So investors can be bullish on stocks.
“Overall, the weight of the evidence is showing us that things are going OK,” Grindal said. She cited two reasons to expect that any U.S. recession – which NDR expects in the fourth quarter — to be moderate.
First, household finances remain robust. We know this, because the ratio of debt servicing costs to income has not surged. One reason is that households locked in low mortgage rates during 2020-22. This may prevent people from moving. But it also obviates a major economic debacle scenario, Grindal said.
Grindal also noted the growth in the percentage of people age 35-49 relative to those who are 20-34 years old. This is bullish because people 35-49 have more discretionary income to put in the stock market.
In an ironic twist, millennials may be bailing out boomer retirement portfolios.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NVDA, MSFT and AAPL. Brush has suggested NVDA, MSFT and APPL in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks
More: Nvidia is forming a bubble, but the overall sector is not
Also read: Nvidia and other tech plays are overpriced. Here’s where you’ll find the next big-money stocks.
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