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Bank of America technical analyst Steven Suttmeyer says the stock market is likely to continue rising.
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In a note on Tuesday, Suttmeyer highlighted four positive signs that point to a healthy bull market.
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“The rotation, which is the lifeblood of a bull market, suggests that the S&P 500 reached its highs last week from a position of strength,” Suttmeyer said.
With the stock market hitting a series of record highs in 2024, there are positive signs that the rally could continue.
In a note on Tuesday, American bank Technical analyst Steven Suttmeyer said the ongoing bull market is healthy amid Widespread turnover in smaller company stocks.
“The breadth of the rally as well as the rotation, the lifeblood of a bull market, suggests that the S&P 500 reached its highs last week from a position of strength, not weakness,” Suttmeyer said. Standard & Poor’s 500.
Strong seasonal indicators toward the end of the election year, coupled with strong technical factors, could help support the stock market to record highs later this year, Suttmeyer said.
These are the four bullish indicators that give Suttmeyer confidence that the market will continue to rise.
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Junk bond spreads are tight.
The spread between yields on risky corporate debt and ultra-safe Treasury bonds shows no sign of worrying the broader stock market.
When investors are worried about the economy and the broader market, they typically demand a higher yield on higher-risk junk bonds than on risk-free Treasuries, which leads to higher credit spreads.
“This credit spread remains narrow, which is a positive sign,” Suttmeier said.
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Corporate bond spreads are tight.
Similar to the signal coming from junk bonds, the chart below measures the difference in yields between higher quality corporate debt and 10-year US Treasury bonds.
“The BAA interest rate spread remains benign (i.e. exposed to risk) at below 2.0,” Suttmeier said.
The spread hit 1.38 in April, its lowest level since 1995. It is now around 1.58, well below the 2.0 level that Suttmeyer says represents a “risky” environment for stocks.
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$6 trillion in cash is a bullish sign.
Holding investors $6 trillion in money market funds This is a bullish counter-signal, according to Bank of America.
This money could fuel a continued stock market rally, especially if the Federal Reserve cuts interest rates, making the current 5% cash yield less attractive.
Such a scenario would likely prompt investors to assess their cash position and eventually consider buying the stock.
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Fed’s Financial Conditions Confirm Rise
The fresh highs the stock market has hit over the past few weeks have been confirmed by fresh cyclical bull market highs in the Chicago Fed’s national financial conditions index, according to Suttmeyer.
This is a healthy sign that will support sustainable gains in the market.
The Financial Conditions Index triggered the last major negative divergence toward the end of 2021, when the S&P 500 was rising even as the Financial Conditions Index declined.
With the financial conditions index recently hitting its highest level since early 2022, it still has room to rise above its 2021 peak, suggesting there is more room for the stock market to rise.
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