Harris Private Bank chief investment officer Jack Ablin says there are signs the stock market just might be setting up for a big run up.
One indicator he is watching is momentum, after the market last week tested the 200-day moving average (by some measures, 882 on the S&P 500).
It has since rallied well above that marker, and if the trend holds, Ablin says he may decide to overweight stocks if other factors he watches also warrant it.
Wednesday's move in the S&P 500 to 932, in fact, put the index an important 5 percent above the moving average.
"By my calculations, we closed above that yesterday. That's a very encouraging sign. History has shown when it does that, you end up owning the market for a couple of years," he said in a phone interview this morning. Ablin says this measure, of course, is not the only factor in his decision making.
"If this holds, it appears there will be a break out. It's supposed to really be on a month-end basis. I'd like to wait another week or so and see if it maintains," he said in an interview.
When the market moves 5 percent below the 200-day moving, it's time to sell. "The last close below 5 percent was January, 2008," he said.
In his recent book, "Reading Minds and Markets," Ablin explains that if someone were to rely on signals sent by the 200-day moving average, history shows they would fare much better than a buy and hold investor.
He did a study of what an investor would have gained following the moving average in the period between December, 1980 through December, 2008. For example, if the investor bought stocks in the Dow whenever it traded 1 percentage point above its 200-day moving average, and sold them whenever it dipped 1 percent below the average, he would have gained $1,681 for every $100. Ablin's model also assumes that the investor was able to put the proceeds in some other kind of securities that average a 4 percent yield. Someone who just bought and held for the same period would have made $890 for every $100.
Ablin said another measure he watches that is potentially bullish is the amount of money sidelined in money markets. That level is currently at 42 percent. He also monitors psychology, which tends to have impact when it is at extremes. Currently, it reflects broad skepticism.
He also watches valuations, which are reasonable, and the economy, which continues to be troubled and is probably a headwind for the market.
Ablin says this could be a pivotal week for stocks and a good guide post for earnings season since it's the first look at a broad group of stocks. The big financials, tech companies and health care, all report. General Electric, watched for its multi-business exposure to the global economy and the health its financial unit, reports Friday alongside Bank of America and Citigroup, viewed as the weakest of the major banks. Goldman Sachs, Intel, Johnson and Johnson all reported earlier in the week.