Posted | by David Moenning |

Stocks struggled in the early going yesterday in response, at least partially, to the fact that the IMF announced a reduction in their forecast for global growth in 2017. Apparently the BREXIT vote has caused the group to rethink their outlook. In fact, just one day before the Brexit vote, the IMF was planning to raise their growth outlook, according to the latest quarterly World Economic Outlook report. However, Britain's vote to leave the EU has thrown a bit of a monkey wrench into economic expectations for the global economy and as such, the IMF lowered their expectations for growth in 2017 by a couple tenths of a percent.

In addition, earnings from the likes of Netflix and IBM initially gave investors pause. However, given that the issues appeared to be company-specific in both cases, traders decided not to hit the panic button and the DJIA actually finished in the green - and at another new all-time high.

Given the apparent breakout to the upside seen in the market, I, for one, have been watching the action closely for signs of continuation and/or weakness. So far at least, it appears that traders have been buying any and all intraday dips and the breakout remains intact. The question for those in the bear camp is why stocks have decided to break out of a long, frustrating trading range at this time.

It's a New Bull Market

As I mentioned yesterday, there are reasons for optimism here. Not the least of which is the fact that according to Ned Davis Research, a new cyclical bull market officially commenced - wait for it - yesterday!

Unlike the silly definition of bull and bear markets used in the media (i.e. +/- 20%) NDR defines a cyclical bull market as either (a) a gain of 30% in the DJIA after 50 calendar days or (b) an advance of 13% over 155 calendar days. And given that the DJIA has advanced 18% from the February 11 low, the criteria was met on Tuesday.

Here's the good news. According to NDR's computers, history shows that cyclical bull markets that have followed a cyclical bear (NDR says a cyclical bear occurred between August 2015 and February 11, 2016) - that also occur within the context of an ongoing secular bull market (which began on March 9, 2009) - tend to produce strong returns.

NDR shows there have been 18 cases of this scenario since 1900 and the average return of these bulls has been more than +106% over 34 months with a median gain of +77% over 29 months. Not bad.

Other Reasons for Optimism

Besides the fact that we've got a fresh bull market on our hands, there are other reasons for optimism here. As I've mentioned a time or two in the past few weeks, the recent joyride to the upside not only produced a breakout on a chart basis, but was also accompanied by impressive "breadth thrust" signals in several indicators.

For example, a measure of breadth using 10-day totals of advance/decline data surged during this rally. And while these thrust signals have been much easier to come by since 2011, last week this indicator hit the highest level seen since January 1987.

It is also good news that the rally appears to be global as well. A measure of breadth thrust on the ACWI (all country world index) recently hit the highest level since... well... ever!

The key to these "breadth thrust" indicators is that stocks tend to perform much better than average in the 3-, 6-, 9-, and 12-months following the signals.

In addition, the reading of "technically healthy" global industry groups, an indicator that has stubbornly lagged for more than a year, moved up into the positive zone last week. And history shows that the ACWI has gained ground at an annualized rate of +22.1% per year when this indicator is positive.

So... while things may get choppy here in the near-term due to the overbought condition (breadth thrust signals are usually accompanied by overbought conditions), some uncertainty, etc. - and the bears are likely to try and test the breakout area around 2120 on the S&P 500 at some point soon - we should recognize that the big-picture conditions are actually pretty positive here.

Publishing Note: I have an early presentation tomorrow morning and will not publish a report.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Global Central Bank Policies
      2. The State of the Earnings Season
      3. The State of U.S. Economic Growth
      4. The State of the Stock Market Valuations

Thought For The Day:

"Partial truth is the enemy's biggest weapon." -- Ross McKnight

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Here's wishing you green screens and all the best for a great day,

David D. Moenning
Founder: Heritage Capital Research
Chief Investment Officer: Sowell Management Services

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