On Wednesday, the S&P 500 Index closed above its 200-day moving average for the first time since March 4. While that move marks an important milestone for an index that has rebounded more than 35% from its March 23 low, we believe market internals may paint an even more promising picture for future stock returns.
Technology and growth stocks were undoubtedly the leaders during the market drop, and many of these stocks have recovered to the point of having positive year-to-date returns. Year-to-date numbers for financials and industrials have been less impressive, but that doesn’t mean they’ve been left behind in the recovery. All 11 sectors have gained more than 20% from the March lows, and every sector, except for the defensive consumer staples sector, is up at least 30%, with energy’s 59% advance leading the way. This has led to strong breadth, or market participation readings. Through Thursday’s close, 96% of the components in the S&P 500 were trading above their respective 50-day moving averages, the most since 1991.
Perhaps more importantly, as shown in the LPL Chart of the Day, these momentum surges historically have been followed by above-average forward returns. February 2019 was the last time more than 90% of the stocks in the S&P 500 traded above their 50-day moving averages, and the S&P 500 went on to post a 29% gain for the year.
“Breadth surges like we’ve seen recently can signal short-term overbought conditions,” said LPL Financial Senior Market Strategist Ryan Detrick. “But for longer-term investors, they have historically marked uptrends with lasting durability.”
IMPORTANT DISCLOSURES This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity. Not Insured by FDIC/NCUA or Any Other Government Agency, Not Bank/Credit Union Guaranteed, Not Bank/Credit Union Deposits or Obligations, May Lose Value. For Public Use – Tracking 1-05016546