Bloomberg News

More Stocks Above Average Is Bullish Sign: Technical Analysis

October 25, 2011

Oct. 25 (Bloomberg) -- The proportion of stocks above their 50-day moving averages rose to the highest level in a year, a sign that the Standard & Poor’s 500 Index’s rally from its 2011 low will last, according to Bespoke Investment Group LLC.

About 90 percent of the stocks in the benchmark index are trading above their average in the past 50 days, the most since Oct. 18, 2010, according to data from the Harrison, New York- based research firm. That marked a reversal from the past year, when the ratio fell even as the S&P 500 reached new highs.

“We have been stressing how important it is for this market to see expansion in underlying breadth during market rallies,” Justin Walters, Bespoke’s co-founder, wrote in a note to clients yesterday. “With the current rally, we are finally getting it.”

The S&P 500 sank to this year’s intraday low of 1,074.77 on Oct. 4 amid concern Europe’s debt crisis will spur a global recession. The index has since jumped 17 percent amid optimism over corporate earnings and steps by European leaders to support banks. About three-quarters of the S&P 500 companies that reported results since Oct. 11 beat analysts’ earnings projections, according to data compiled by Bloomberg.

“It’s important to note that 90 percent is an extremely overbought level, which means that we’re due for some sideways trading here in the short-term at the least,” Walters wrote. “However, the fact that we’ve finally seen a major expansion in the number of stocks participating in this rally is a very positive sign for the long-term prospects of this bull market.”

The rally that lifted the S&P 500 as much as 102 percent on a closing basis from a 12-year low in March 2009 stalled after reaching a three-year high on April 29. While the index has risen 11 percent in October, poised for the best monthly gain since 1991, it’s still down 0.3 percent this year.

Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

--Editors: Joanna Ossinger, Michael P. Regan

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.


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