From the desk of Willie Delwiche.
Key Takeaways:
- Breadth thrust regime from last year has expired
- Higher inflation and unbalanced asset allocations can weigh on stocks
- Global earnings revisions trends remain healthy
2020 was a remarkable year in many ways. The rally that emerged off of the early year lows was broad-based and historically strong. It was fueled by numerous momentum surges, overwhelming amounts of fiscal and monetary liquidity, an unprecedented string of better than expected economic data, and a persistent trend in earnings estimates being revised higher. While 2021 began with some of those tailwinds intact, as we move toward the second half of the year, we want to avoid the assumption that nothing has changed as we have entered year two of the cyclical rally.
Breadth thrusts can signal strong and sustainable upward momentum for stocks that can last for up to a year. Our two favorite indicators are having 90% of stocks above their 50-day averages and/or 55% of stocks at new 20-day highs. These indicators last sent signals in late May and early June last year, and the breadth thrust regime from those signals has now expired. All of the net gains for the S&P 500 since 2010 have come during breadth thrust regimes. The path forward could remain rocky without another round of breadth thrusts.
