This is an unusual stock market environment.
The economy is in trouble. Earnings are contracting, and valuations are at record highs. Technical indicators say the stock market is overbought and due for a sell-off.
There are countless reasons to be bearish. Yet, major market averages keep going up. And almost all individual stocks are also going up.
By one definition, 85.98% of stocks are in an uptrend as the chart below shows.
Percentage of Stocks Closing Above the 200-Day Moving Average
Source: Bloomberg.
This chart shows the percentage of stocks traded on the New York Stock Exchange that are trading above their 200-day moving average (MA). The 200-day MA is a popular way to define the trend.
If the stock is trading above the MA, it is considered to be in an uptrend and when the price is below the MA, it is considered in a downtrend.
A Rare Occurrence in the 200-Day Moving Average
Right now, more than 85% of NYSE stocks are in uptrends. That’s not unprecedented, but it’s close. Since 1994, there are just two other times when this indicator topped 85%.
The first time was in October 2003. The S&P 500 Index gained 15.6% in 5 months before the indicator fell back below 85%.
The second time this happened was in July 2009. The S&P 500 gained 14.5% in 3 months before the percentage of stocks fell below 85%.
History tells us the stock market could pull back soon. That decline is due in early 2021. Before then, we should see a double-digit gain in major averages.
Of course, with just two examples, we don’t have a statistically significant sample size. Stocks could fall.
But traders know that rapid gains are to be made when something unusual is taking place in the market.
The highly unusual number of NYSE stocks trading above their 200-day MA is important to consider since this is just the third time in 27-years the indicator has reached this level.
Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.
