Stocks could benefit from moving average breakout: Bespoke

A year that had been looking pretty bleak for the stock market suddenly appears to be turning a corner.

Since the Feb. 11 low, the S&P 500 has gained about 14 percent, thanks to strong performance from materials and energy stocks. However, other sectors are starting to catch up to give the rally more balance, and that has triggered an important signal that historically has portended for even stronger gains.

Last week, for the first time since September 2014, all 10 S&P 500 sectors were above their 200-day moving averages. Financials, which remain negative for the year but have gained more than 12 percent over the past three months, were the last group to cross over.

Going through such a long period of running below the trend line is unusual, as is having the entire index move above it after being below for more than a year. However, in three of the four instances since 1993 when each sector had cleared the 200-day average, it was a "profoundly bullish" market sign, according to Bespoke Investment Group.

Breaking out

When streak ended
Length (trading days)
3-month returns
6-month returns
12-month returns
10/20/1993 306 1.80% -5.20% -1%
2/15/1995 325 8.80% 15.60% 33.80%
5/30/2003 1,000 4.10% 9.80% 16.50%
7/22/2009 507 14.40% 17% 15.90%
4/19/2016 393
Average 7.20% 9.30% 16.30%
Source: Bespoke Investment Group

"Improving breadth is only one indicator, but in this case it is flashing a very strong signal that gains in U.S. stocks have come on strong participation," Bespoke said in a note. "This typically signals more enduring rallies than gains on narrow breadth."

Small-cap stocks are experiencing a similar move.

The Russell 2000, a benchmark for the group, closed above its 200-day moving average last week after a stretch of 167 days below, its fourth longest on record. Such breakouts have been historically positive as well, with Bespoke finding that the index was up an average of 37.7 percent six months after the three longer periods — in 1982, 2003 and 2009 — below the average.

Despite the positive trends of late, investors remain nervous about stocks even though the S&P 500 is now up nearly 2 percent percent year to date. Major market indexes were modestly negative in Monday afternoon trading.

Safety-conscious investors have been pushing most of their money to bonds this year, with fixed income pulling in $45 billion so far and equities seeing $59.6 billion out outflows, mostly from actively managed mutual funds, according to Bank of America Merrill Lynch.

As for individual funds, the SPDR Gold exchange-traded fund, which tracks the yellow-metal's prices, has pulled in $6.2 billion of investor cash so far, easily the leader, according to FactSet.

Bullish sentiment, however, hit a five-week high last week at 33.4 percent, according to the American Association of Individual Investors Sentiment Survey. Neutral sentiment remains elevated at 42.7 percent, with bears at 23.9 percent, below the historical average of 30 percent.