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Weekly Market Commentary

A TECHNICAL CHECK-IN: THE GLOBAL BULL LOOKS STRONG

Burt White Chief Investment Officer, LPL Financial
Ryan Detrick, CMT Senior Market Strategist, LPL Financial
Dave Tonaszuck, CMT Technical Strategist, LPL Financial

KEY TAKEAWAYS

Longer-term technical indicators on equities continue to look strong.

Global equity strength is yet another clue that the current bull market is still alive and well.

The global equity bull market is alive and well, with very broad participation. Longer-term technicals continue to look very healthy and strong, even as the bull market and economic recovery in the U.S. turns eight years old. A closer look at key indexes suggests the path of least resistance remains higher for stocks, although it likely won’t be an easy ride, as volatility could creep higher during the second half of 2017.

IT IS A GLOBAL BULL MARKET

Our methodology at LPL Research focuses on three key tenets of investing: fundamentals, valuations, and technicals. Out of the three, technicals have been the most bullish over the past year, and fortunately remain bullish today. One such example of our technical evaluation was on October 17, 2016 when many were worried about the coming U.S. election. We noted why technicals remained very strong and that has since played out well. This week we will take a closer look at some of the reasons that technicals continue to suggest equity strength.

As of June 23, the S&P 500 Index has made 24 new all-time highs so far in 2017 and is up 8.9% for the year, which is already at the average yearly gain since 1950* of 8.9%. But many do not realize that developed and emerging markets have been even better this year. After lagging the FTSE USA Index for six of the past seven years, the FTSE All-World Ex-US Index has started to outperform this year. This is a great sign that the global bull market still has legs left, and is one big reason to expect that the equity bull market in the U.S. has the potential to continue as well.

The easiest way to show how global markets are doing is via the FTSE All World Ex-US Index. This index includes 46 different countries, but as the name suggests, it excludes the U.S. components. Technically, this index recently had a major breakout in April to new highs, above past resistance from the 2014 and 2015 peak. All in all, it further confirms this bull market is global, not just a U.S. event [Figure 1].

1  THE GLOBAL BULL MARKET CONTINUES TO IMPROVE

What does it mean? With more areas for investors to find alpha, this could potentially usher in a very good period for active management. Simply investing in the S&P 500 has been an oft-used strategy the past few years, and it has made passive investing very popular. With global markets starting to outperform, we continue to believe that investing in a well-diversified portfolio is the way to go and active management may be one way to potentially benefit.

DIGGING DEEPER INTO THE TECHNICAL INDICATORS

We can also look at market breadth for additional insights on how global equity markets are doing. Market breadth is one of our favorite ways to measure the underlying health of the stock market and confirm bullish trends. We think reviewing market breadth is helpful, as it highlights the portion of the overall market that is participating in up or down moves.

One important measure of market breadth is the percentage of companies in an index that are above their 200-day moving average. In general, if 50% or more companies in an index are above their 200-day moving average, the index is considered healthy; if that number falls below 50%, the index is considered unhealthy and potentially problematic.

Global Market Breadth Data

So far in 2017, the equity markets have experienced strong market breadth globally across major equity indexes which increases our confidence that stocks may move higher over the long-term time horizon.

The market breadth across six global equity indexes is illustrated in Figure 2, and we are encouraged that more than 50% of the companies within these indexes are above their 200-day moving average. More importantly, if an index has high magnitude and/or direction values, it represents healthy market breadth; however, it is important to note that this may not always translate into outperformance for the equity group.

As shown in Figure 2, global market breadth as measured by the magnitude and direction of the six major equity indexes studied is considered strong; each index shows broad internal participation and improving intermediate-term conditions. It is worth noting that even the NASDAQ has broad participation. Much of the media attention is that only the FANG stocks (Facebook, Amazon, Netflix, and Google) are going higher, and that simply isn’t true.

2  MARKET BREADTH OF SIX GLOBAL EQUITY INDEXES

S&P 500 Returns After Global Market Breadth Confirmation

When looking back at historical data, since 2000 when the six major equity indexes listed in Figure 2 had a market breadth magnitude greater than 50%, average and median subsequent returns for the S&P 500 tended to move higher [Figure 3]. All six global indexes confirmed the market breadth magnitude metric on December 28, 2016, suggesting there is potentially more room to run for U.S. equities over the long-term time period, e.g., greater than one year. We note that the S&P 500 has been up 9.4% since this signal, further confirming that this indicator looks solid to us.

3  GLOBAL MARKET BREADTH CONFIRMATION TENDS TO BE BULLISH FOR U.S. EQUITIES

Incorporating a global market breadth approach to investing could potentially help investors achieve better outcomes than one focused solely on domestic market breadth. For example, the one-year average and median returns of the S&P 500 since 2000 were 6.1% and 10.7%, respectively, which were lower than the returns displayed in Figure 3 generated after global market breadth was confirmed.

CONCLUSION

As explained in our recently released Midyear Outlook 2017: A Shift in Market Control, we expect volatility to potentially pick up in the second half of this year, but believe the bull market should continue. One of the healthiest things we can see for a bull market is broad participation and with so many global markets and indexes performing well, this is a clue that the bull market is alive and well. We are encouraged by these technical trends that demonstrate continued strength in the global bull market, and we will continue to monitor these indicators. 30

The Weekly Market Commentary will not be published on July 3, 2017. Look for our next publication on July 10, 2017.
We wish you all a happy and healthy Independence Day!

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