Ned Davis Research recently highlighted several bullish signals that indicate potential further upside for the stock market. The firm’s strategists identified three key indicators that flashed positive over the past week, following a significant sell-off earlier in the month.
The first indicator, the 40-Day Trading Index, suggests a bullish trend when "crowd trading extremes" imply that an upward move in stocks is the "path of least resistance." Last week, the index signaled that stocks were oversold—a condition that has historically led to market gains 60% of the time since 1981, according to NDR.
The second signal, known as the 10:1 up day, occurs when advancing stocks outnumber declining ones by a 10:1 ratio. In August, stocks recorded their eighth 10:1 up day since last November, a pattern that NDR strategists say is "consistent with above-average returns" over the next six months.
The third bullish signal comes from NDR's Daily Momentum Model, which turns positive when at least 65.5% of the firm's 94 short-term momentum indicators are favorable. Last Friday, the model reached 68.6%, a level that has historically led to an average annual gain of 10% since 1979.
These short-term indicators appear to support a bullish outlook for stocks, with NDR noting that other measures of market breadth have shown resilience despite the recent pullback.
However, NDR also urged caution regarding the longer-term outlook for equities. The firm pointed out that valuations remain "stretched to the upside," echoing concerns from other market commentators about a potential AI-driven bubble inflating the value of the largest stocks.
One valuation metric indicates that the market is currently more overvalued than at any time since 1929, according to prominent investor John Hussman.
NDR strategists emphasized, "The recent selloff has done little to alleviate the overextended long-term trend and valuations. While the market can overshoot, as it did in 2000, both the long-term trend and valuations remain elevated."
Despite a brief resurgence in recession fears, investor sentiment remains largely positive. The latest AAII Investor Sentiment Survey shows that 43% of investors are bullish on stocks for the next six months, up from 41% the previous week.
