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No reason to be bearish on stock market: Morgan Stanley

While fundamental analysis of the U.S. stock market may leave you concerned about stretched valuations, some technical analysis should calm your nerves: The long-term upward trend is still intact for now, according to Morgan Stanley analysts.

In a research note, they said the underlying trend, measured by long-term moving averages, suggests that momentum is strong, and they don’t yet see a reason to be bearish.

The S&P 500 SPX, +0.09%  on Tuesday closed at 2,575.26, ending a seventh straight month with gains, the longest such monthly stretch since 2013. On total return basis, the index has sailed through the entire year without a negative month.

All three benchmark indexes are trading at or near record levels, while volatility, both realized and implied, are at historic lows.

Theoretically, any one of the all-time highs these days could be the last one before the market rolls over. But for those investors who are looking for a perfect indicator to time the market, the news is disappointing; moving averages are ineffective at predicting short-term returns and, as such, are poor at timing the market.

Even when they do signal a turn in a major trend, their lagging nature often means it comes too late. Another drawback of relying on moving averages is that they do not work in range-bound markets. The averages can flip up and down rapidly in such markets, resulting in many false signals.

What are the moving averages?

The 200-day moving average is often used for gauging the underlying trend. As its name implies, it is a smoothed average of prices over the past 200 trading sessions, or roughly a year.

A shorter-term trend is gauged by a 50-day moving average. The strategy that excites chart-watchers the most is the crossover of the two.

If the shorter-period moving average rises above the longer-period one — often described as a “golden cross” — it indicates an uptrend and is viewed as a buy signal. When it falls below, also known as a “death cross,” it indicates a downtrend, or a sell signal.

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