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Rare Signal Flashes On S&P 500, Next Stop 2400

Summary

The number of S&P 500 companies raising guidance is at the highest level in the past 10 years.

The S&P 500 is up 5 months in a row.

The S&P 500's trend remains up on the daily, weekly and monthly time frames.

Never short a dull market.

With the S&P 500 SPY down two days in a row, the top callers are once again out in full force. Every time we get a couple of down days in a row their prophecies start up again about impending doom. Despite all of their efforts in July, the S&P 500 is still up over 9% from its July lows from 1990 to 2175. While the S&P 500 continues to trade in a tight range the past few weeks, the Nasdaq QQQ and Russell 2000 IWM are playing catch up. The Nasdaq made a new all-time high last week, while the Russell 2000 has now taken out its resistance from November and December of last year. Despite the S&P 500 being quite anticlimactic the past few weeks, a couple of rare signals are flashing which are pointing to much higher prices. Bears have continually warned about the gloomy fundamentals, despite the technicals painting a completely different story as all U.S. markets make new highs. Unfortunately for bears, these new signals are both technical and fundamental and spell trouble for their "problematic fundamentals" thesis.

Earnings recession coming to an end

While the bears have been babbling for months about how we're in a recession, they've ignored the most recent Q2 2016 statistic. Based on S&P 500 revenue growth for 2016, the market has come out of its recession the past 5 months and has turned positive despite headwinds in biotech and energy. While 0.1% is a meager number and not huge growth for the quarter, it has come a long way from the brief earnings recession we were in the past 5 months. The fact that the market shrugged off Q1 2016 revenue growth of negative 1.5% is an example of how the market is forward looking. If fundamentals really mattered as much as the bears say they do, the market would have been decimated after Q1 2016 earnings season. Instead the S&P 500 marched higher in the face of a 5th straight negative quarter for revenue growth. This is because the market is always forward looking and does not care about the latest statistic, it is looking at what the next quarter will look like and constantly adjusting to that. In Q4 2014 the S&P 500 did the same thing as we had revenue growth of 2.0%, yet the market topped after earnings season and had a very weak start to 2015.

In addition to revenue growth swinging positive for the S&P 500, we have the highest percentage of companies raising guidance in the past 10 years. The below chart by Callum Thomas shows that nearly 90% of companies are raising guidance, higher than the 88% reading in late 2009 and the 85% reading in early 2004. Historically we have seen these readings as the market exited bear markets, and we are seeing the same thing again today after we have experienced two sharp corrections of 12% or more over the past 12 months. Bears will likely say that it means nothing if companies raise guidance after previously revising earnings lower, but the fact is they still managed to fool the market. While everyone was expecting lower oil and continued misses on earnings for companies, most companies have beat and raised guidance just last month. In 2004 this signal sparked a 42% rally over the next 3 years, and in 2009 another 85% + reading sparked a 90% rally over the next 5 years.

The S&P 500 is up 5 months in a row

The S&P 500 has done something very rare as of August, with only 32 instances of this occurring in history. The market has...


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