Spencer Platt/Getty, Tyler Le/BI
The stock market just flashed a bullish technical indicator that suggests double-digit gains are in store for the S&P 500 over the next year.
That's according to a Wednesday note from Ned Davis Research strategist Ed Clissold, who said the stock market has entered the fourth stage of its bottoming process following its early August sell-off.
The stock market fell more than 5% in early August amid a confluence of risks, including a weak July jobs report, a yen carry-trade unwind, and Warren Buffett slashing his stake in Apple.
But since then, the S&P 500 has rallied nearly 10% and is just 1% shy of record highs.
"New breadth thrust signals confirm that the market is in step four of the bottoming process and moving past the recent pullback," Clissold explained, adding that the four stages of a stock market bottom are oversold, rally, retest, and breadth thrusts.
On August 19, a new breadth thrust signal flashed, which occurs when the stock market swiftly transitions from very few stocks participating in the upside to many stocks moving higher at the same time.
"The rationale is that if a few stocks run into trouble, others can propel the popular averages higher," Clissold said. "The beginning of major moves is often marked by breadth thrusts, or an extremely high percentage of stocks rallying together."
A breadth thrust "fired" on Monday when over 90% of stocks in NDR's internal Multi-Cap Equity Series jumped above their 10-day moving average.
Since 1980, there have been 42 such instances, and stocks were higher 95% of the time one-year later with an average gain of 10%.
Such a gain from current levels would put the S&P 500 at just above 6,100, which is nearly in-line with one Wall Street bull's 2025 price target.
Another breadth thrust flashed on August 8 when stocks saw an "11:1 up day," which occurs when volume in advancing stocks is 11 times that of the cumulative volume in declining stocks.
Ultimately, Clissold wants to see at least five breadth thrust signals flash in a three-month period to be certain that the stock market has more upside ahead.
So far three signals have flashed since July 16, but even if two more don't flash by the middle of October, stocks are likely still in a good spot thanks to the expected decline in interest rates, according to the note.
"We may not get five breadth thrust signals, but additional trend indicators are turning bullish," Clissold said. "Falling rates are another check in the bulls' favor."
