Rare Signal Says Stock Rally Is The Real Deal

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Includes: CRF, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, LLSC, LLSP, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TALL, TNA, TQQQ, TWM, TWOK, TZA, UDOW, UDPIX, UPRO, URTY, USA, USSD, UWM, VFINX, VOO, VTI, VTWO, VV, ZLRG
by: Chris Ciovacco

Summary

Is the Trump rally a flash in the pan?

How does the market's move compare to sustainable moves in the past?

How does 2017 compare to 2000 and 2007?

Only Three Other Occurrences Since 2002

The True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes. As shown in the monthly S&P 500 graph below, a positive momentum crossover (black moves above red) has only occurred four times since 2002. In the three previous cases, the S&P 500 (NYSEARCA:SPY) rallied for a long period of time after the crossover; the average gain was 52%.

Indicators Speak To Probabilities

Since no indicator can predict an uncertain future, the bullish crossover that recently occurred helps us with the probability of goods things happening relative to the probability of bad things happening over the coming months and years. Signals on monthly charts tell us little about the next few hours, days, and weeks. From Stockcharts.com.

As with MACD, a signal line can be applied to identify upturns and downturns…TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price.

Do Other Long-Term Indicators Align With TSI?

The True Strength Index tells us long-term momentum has improved in a bullish manner. This week's video looks at other ways to monitor the strength of the current rally (NYSEARCA:VTI) by comparing 2017 to major bullish and bearish turns since 1996.

Video

Video

Bullish Cross Came After Election

Markets move based on an almost infinite number of factors, including anticipated regulation and fiscal policy. The True Strength Index had a much more concerning look prior to the U.S. Election. In the figure below, monthly TSI for the S&P 500 (NYSEARCA:VOO) as of October 31, 2016, is shown on the left. The same indicator is shown as of February 27, 2017, on the right.

President To Address Congress

Markets will be looking for new information on tariffs, taxes, regulation, and infrastructure when President Trump speaks to a joint session of Congress Tuesday. From NPR:

This week the White House has hinted at a different mood, using words such as "sunny" and evoking the memories of President Reagan's often heart-tugging rhetoric in his speeches to Congress and the nation. We can expect to hear more about what's going right in America.

Disclosure: I am/we are long SPY, VTI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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