Soooo, Will the Stock Rally Keep Going, and for How Long?

With 90% of S&P 500 stocks above their 50-day moving average, look for at least another good six months, LPL’s Detrick says.

Now that a dolorous December has given way to a fresh stock rally, the usual wall of worry that any advance must climb is stoutly in place. Many investors wonder how long, in view of the last market downturn, the current stock run can last.

But due to momentum, the answer is at least another six months. That’s how LPL Financial’s senior market strategist, Ryan Detrick, sees things. His reasoning: “over-bought” markets like this one tend to keep on keeping on.

“Yes, stocks are quite extended near-term,” he said in a research report, “but historically, extended markets have tended to deliver continued outperformance over the next several months.”

The market is over-bought, according to Detrick, because the number of S&P 500 stocks above their 50-day moving average is high, slightly above 90%. When that happens, he wrote, one-, three-, and six-month returns have “shown continued strength.”

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By LPL’s reckoning, three months after hitting the 90% level, the benchmark has been higher 12 of 13 times since 1960. And for one and six months, it was higher nine times. Most recently, in early 2016, the S&P was ahead (for one, three, and six months) by 2.8%, 1.8%, and 5.2%, respectively.

For the last three days, the S&P 500 has basically traded water amid more downbeat economic data, international turmoil, and lack of progress on resolving the US-China trade clash. But look at it this way: in December, such news would have clobbered the market a lot harder.

Another point: Over-bought does not always equal overly expensive. Indeed, the index’s trailing price/earnings ratio, as calculated on reported earnings by Birinyi Associates, is 16.5, not much more than the long-term average. But by any measure, life has been good for stocks lately, with the S&P up 11.5% year to date.

After the six-month mark, Detrick said, “the easy part of the recent rally is over.” While he expects a pullback at some point, he also believes there will be “new highs later this year.”

Needless to say, not everyone is so sanguine. The rally rests on a second-half improvement of global economic conditions, warned David Levy, chairman of the Levy Forecasting Center—a circumstance that his most recent forecast termed unlikely.

“In fact,” he stated, “the world economy is most likely going to deteriorate more than widely expected in the first half…but testing investor optimism about the second half.” A slowing Chinese economy has Levy and many others worried. He cast doubt on the current Beijing government stimulus plan’s ability to return the world’s second-largest economy to a decent growth level.

Well, assuming LPL’s Detrick is right about the near-term, we should enjoy it while we can.

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