A Rally Skeptic Says This Bullish Signal Is ‘Hard to Ignore’

(Bloomberg) -- Measures of stock-market breadth show that the damage done during the coronavirus-fueled slump is largely repaired, and that is a bullish signal for equities, according to an analysis from Sundial Capital Research.

McClellan Summation Indexes, which track the momentum of the underlying breadth of stocks moving in a benchmark, now show a “complete recovery,” Sundial's Jason Goepfert wrote in a note Wednesday. Such a move higher in the NYSE version has historically been a good sign for stock performance in coming months, even more so when the healing happens as quickly as it has here, he said.

“The rally has lasted long enough, and has been widespread enough, that longer-term breadth measures are recovering from their March devastation,” Goepfert wrote. Forward returns were “excellent” during periods in the past when the gauge swung to such a large degree within two months, he said.

Almost all major indexes tracked by Sundial now have positive McClellan Summation Indexes, according to the report. What's more, Goepfert found seven instances since 1962 when the NYSE's McClellan Summation Index recovered from below -1,000 to above +500 within 40 days -- and in every instance, the S&P 500 was higher two weeks out, as well as three months and one year afterward.

“What makes this recovery more impressive is how broad it is. Not just within the S&P 500 or even the NYSE, but across markets and across regions,” he wrote in the report. “It's hard to ignore this.”

By no means is Goepfert a perma bull. He has questioned multiple aspects of the market recovery in recent weeks, including the small group of stocks dominating gains and extreme bullishness by small options traders that he said is a bad sign for equity performance.

He even has a caveat on the McClellan Summation data: investors should be aware of anything that claims perfection, and ideally, he would look for “some kind of medium-term digestion to work off signs of shorter-term speculation and overbought conditions,” he concluded.