The S&P 500’s bull cycle should continue to reach new highs in the comings weeks to months, according to Ari Wald, Technical Analyst at Oppenheimer.
The breakout by the Russell 2000, in particular, is convincing bullish evidence for the S&P 500. Wald has studied the relationship between the Russell 2000 and the S&P 500 and finds that a Russell 2000 breakout is usually followed by above-average S&P 500 performance, not a major top.
Wald defines a Russell 2000 breakout as when 1) the index reaches a 52-week high and 2) the index’s 52-week rate-of-change is below 10%. (This use of rate-of-change “screens for new 52-week breakouts and removes occurrences of an established trend”).
Since 1979, S&P 500 performance has been above-average in the following 4, 13, 26 and 52-week periods when the above criteria are met, says Wald; achieving average returns of 1.4%, 3.5%, 8.3% and 16.0% respectively. (See chart and table. Buy signals are flagged by vertical lines).
Wald says that choosing stocks with a bullish relative trend should provide the best odds of delivering both absolute and relative gains. As such, his stocks of choice for the S&P 500 are: AAL, AAPL, AMGN, AVB, BLK, BRCM, CHRW, CRM, CSX, DAL, DHI, EQR, KMI, LEN, MCO, MMC, MPC and RHT.
See chart and table.