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Even More Upside Ahead?



We would like to update our Upside Ahead? Thesis report. In that report, we highlighted the historical returns when there is enough momentum to move the 14-period monthly stochastic above 40 after a climactic positive market reversal. As the market consolidates, we have some food for thought.

While everyone is worried about how far stocks have come, we found that the greatest gain (from the FTN Midwest Signal) in the market comes AFTER a monthly reading of overbought in the S&P 500. This took place in September at SPX 1022. In fact, the average gain after overbought for the eight signals since 1970 was 45% over the next 23 months. When you strip out the 1994 signal, the gain was 20% on average over 17 months for the other 7 signals (Table 1). Over the last three decades, there has never been a significant and sustainable decline after the signal was initiated (as it was in June at SPX 972) and the SPX became overbought (stochastic above 80).

Again, we continue to look for a near-term correction/consolidation, but the point is that no evidence we find suggests it should be a sustainable or significant decline or that "this time should be different."

Table 1 - Long-term overbought is a very good sign

A long-term view of S&P 500 - arrows denote initial overbought

Source: Reuters

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