The Next Leg Higher

If you missed it, Larry Summers is no longer in the running to be the world’s most influential economic policy maker. The news came out over the weekend, prompting stocks to open significantly higher this mornrning.

The reason behind the market’s jubilance is rather simple. Summers was expected to be more hawkish – that is, less willing to continue providing the unprecedented monetary stimulus to which the market has grown accustomed – than the relatively dovish Janet Yellen.

That’s why five stocks were trading higher for every one trading lower this mornrning.

And if you’ve followed me for any length of time, you may remember that this is a technical trigger I watch closely. Lopsidedly bullish days – when the ratio of advancing to declining stocks is 4:1 or 5:1 – have the tendency to jumpstart rallies.

Here’s a chart of SPY, showing the signal’s potency over the last two years.

See larger image

Since 2012, we’ve seen an advance-decline ratio of five or greater nine times. Buying 100 shares of SPY each time the signal was generated and holding for three months would have resulted in a win rate of 100% (nine out of nine winners) and net profits of about $5,600.

So, does today’s bullish signal foreshadow another three- to six-month rally?

With the S&P 500 near its all-time high, many analysts are calling the market “toppy.” Yet, I continue to see classic signs of an up-trending market. That is, higher highs and higher lows.

This, combined with the fact that underlying market breadth indicators support the case for higher prices, leads me to believe the current bull market will continue.

Today’s strong surge in the advance-decline line is likely just the start of the next leg higher.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.