(Bloomberg) -- Ned Davis Research has kept a bullish recommendation toward US equities for more than a year, but that may change soon if the weakness seen over the past month persists.
Tim Hayes, the firm’s chief global investment strategist who correctly called the current bull run in US stocks, is closely monitoring whether Ned Davis’s Stock/Bond Composite extends its recent decline. Traders use this key indicator to assess the direction of equities, and it’s been sinking as markets are coming to grips with the already-slim chances of the Federal Reserve lowering borrowing costs again soon.
If the gauge drops into bearish territory below 40%, from the current reading around 60%, that would break an uptrend that began when equities bottomed in October 2022. In that scenario, it would suggest a decisive negative turn for stocks that would lead the firm to trim the weighting of domestic stocks in its recommended portfolio, he said. The current allocation has been at 70%, the maximum, since December 2023.
“If the weakness persists along with increasingly bearish indicator evidence, we will be likely to cut our equity exposure from the maximum overweight allocation maintained throughout 2024,” Hayes wrote in a note to clients on Thursday.
On Friday, the S&P 500 Index was on pace to snap five straight sessions of losses — its longest losing streak since April. The benchmark is coming off a 2.5% slide in December, its worst since April, pulling back from the record closing high it set early last month.
The firm’s Stock/Bond Composite measures things such as relative performance between assets to assess the prospects for equities. Roughly half of its weight is based on technical indicators, and the other half is based on factors such as the macroeconomy.
Since the bull run in US stocks began over two years ago, the composite has trended upward, with higher highs and higher lows.
The gauge is currently sitting at a crucial inflection point that could turn the tide for stocks in the short-run. That’s why Hayes is watching for whether there is a slowdown in the pace of earnings growth, a further contraction in manufacturing activity and whether technology and consumer discretionary shares in the ACWI Growth Index break their uptrends.
Other analysts are also sounding concern over the technology rally, which came to a halt last month.
Slowing profits “may surprise some of the die-hards who are betting on these very high double-digit earnings numbers,” Lisa Shalett, chief investment officer for Morgan Stanley’s wealth management unit, said Thursday in an interview on Bloomberg Television.
Ned Davis’ Hayes still sees potential for equities to gain. Last year’s 23% advance in the MSCI US Index is consistent with the bullish trend over the course of the secular bull market, he said.
In fact, several conditions are currently conducive to supporting the rally. For one thing, he said the market is oversold based on certain short-term metrics he follows. The stock market is also entering a period of historical strength. It tends to gain in the first half of January due to increased investment activity and positive sentiment in the new year, according to data compiled by Goldman Sachs Group Inc.
Still, a failure for equities to rebound in the coming weeks from December’s slide would be telling, Hayes said. The month’s performance wasn’t consistent with the secular bull market, he said.
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