The ratio between low and high quality stocks is giving a bullish signal for the S&P 500, says Ari Wald, Technical Analyst at Oppenheimer.
When stocks are separated into quality rankings (based on measures of growth, earnings stability and dividend), Wald says the ratio between Low Quality (LQ) versus High Quality (HQ) stocks can give a clear picture of overall market characteristics. For example, when the ratio points toward LQ stocks (as it is now), this tends to be characteristic of a cyclical advance. On the other hand, HQ stocks tend to be embraced ahead of volatile downside market swings, such as in August 2015 and January 2016.
In the context of today’s market, Wald sees it as a bullish sign that leadership has continued to point towards LQ while the S&P has corrected.