Why 2023 Could Be the Start of a Bullish Trend

Every day, the stock market reveals whether a trend will persist… or reverse.

In a bull market, a growing number of stocks hit new highs. That’s a great sign of broadening participation in an uptrend.

But an increasing number of stocks hitting new lows is a major warning signal. That tells you the stock market’s foundation is crumbling, and to be on the lookout for bearish trends.

In late 2021, the stock market gave an early warning signal that a bear trend was about to be underway. And over the next year, we painfully watched this market trend play out.

But now an important transition is taking place in 2023…

A Bear Market Warning

“Net new highs” are the daily difference between new, 52-week highs and lows on the major stock exchanges. You can use these differences to track the trend of bull versus bear markets.

A positive figure means there are more stocks making new highs compared to new lows, while a negative figure means the exact opposite.

This simple metric can deliver timely insights about the state of the stock market’s trend… and if a change in direction is in store.

For example, this line flashed a warning before 2022’s bear market ever arrived.

Here’s the net new highs line (shaded area) along with the S&P 500 Index (blue line) at the end of 2021…

A modest 4% pullback in the S&P 500 (black arrow) also saw a huge spike in stocks making new lows (circled area).

That was a clear signal that participation in the rally was faltering, and ultimately gave way to the bear market.

But this year, net new highs are starting to tell a different story…

Follow This Expansion in New Highs

Since late 2022, several important developments have taken place in net new highs.

Take a look at the chart…

First, note the level of net new highs (point A) as the S&P 500 sold off to new lows (point 1). But as the S&P bounced around the lows at point 2, the net new highs figure quickly improved (point B).

In other words, fewer stocks were making new lows. This was a clue that the trend was improving despite weakness in the broader indexes.

And now it looks like 2023 is off to a strong start…

Net new highs are spending most of the year in positive territory (shaded box). That’s notable because the S&P 500 remains 15% below its own 52-week high of 4632.

That’s a sign that the average stock is holding up this year, which is what you need to see during a bullish phase.

For this phase to continue, we need to see further expansion in net new highs across the stock market.

Alternatively, a sudden plunge back into negative territory would be a sign that the bear market is about to assert itself once again.

Reader Mailbag

Do you think 2023 could be the start of the next bull market trend?

Let us know your thoughts – and any questions you have – at [email protected].