Merrill: Long pause healthy for bull market

Published Wed, Jun 8 20165:00 AM EDT

The lack of new highs in the past year mimics the performance of previous bull markets before they took off, according to research by Bank of America Merrill Lynch. "Investors hate to chase a rally, but a new S & P 500 high after a long pause would be a bullish signal," technical research analyst Stephen Suttmeier wrote in a recent note to clients. Since reaching a record price of 2,134.72 on May 20 last year, the S & P benchmark has gone through a period of volatility, failing to reach a new high as investors debate the longevity of the bull run, now the longest on record. Since 1929, the S & P closed at a new 52-week high 1,916 times, BofAML highlights. As of June 7, however, there has been a span of 383 calendar days without a new high, a long pause the investment bank defines as "very bullish." Indeed, the scarcity of new highs coincides with previous historical instances when the index proceeded to post gains, the investment bank describes. Here's what Suttmeier said in his analysis: "The S & P 500 new high after a long pause signal has happened only 23 times going back to 1929 and generates well-above-average median 10, 20, 30, 65, 130, 190, and 250-day returns. In fact, the 250-day average return after this signal is 15.6 percent (14.8 percent median), with the S & P 500 up 91 percent of the time. So, whether a new 25-session high happens now or later, the data suggest that a new high after a long pause is a bullish signal to watch for." At the current levels, the S & P 500 trades within 1 percent of a new record, up nearly 6 percent in the past three months, another bullish sign in the face of what BofAML calls "bad news." "The S & P 500 held first support at 2,085 and has remained resilient in the face of bad news. We have noted improving breadth and momentum, as well as last week's volume-intensity buy signal," Suttmeier stated. Bank of America Merrill Lynch also notes that June through August is the best three-month period of the year dating back to 1928, with the index up 63 percent of the time, posting an average gain of about 3 percent. "This technical backdrop suggests a continued climb up a wall of worry. Many of these worries are known, feared and part of the daily market narrative," Suttmeier said. The Money Play: At the individual stock level, Bank of America Merrill Lynch highlighted a list of breakout candidates based on technical moves and confirmed by a rise in trading volume. Some of the stocks to make the cut include Broadcom , Ciena , Quest Diagnostics , Dish Network and Agnico Eagle Mines .

The Merrill Lynch bull, statue and corporate symbol, outside the Merrill Lynch Denver Meridian complex

Cyrus McCrimmon | The Denver Post | Getty Images

The lack of new highs in the past year mimics the performance of previous bull markets before they took off, according to research by Bank of America Merrill Lynch.

"Investors hate to chase a rally, but a new high after a long pause would be a bullish signal," technical research analyst Stephen Suttmeier wrote in a recent note to clients.

Since reaching a record price of 2,134.72 on May 20 last year, the S&P benchmark has gone through a period of volatility, failing to reach a new high as investors debate the longevity of the bull run, now the longest on record.