Afraid of Momentum? Don't Be

The S&P 500 is trading 4.3 percent above its 50-day moving average (about 1 standard deviation), and technician Chris Verrone of believes the trend will continue. His Monday morning note to clients includes data demonstrating the S&P 500 trends to rise EVEN AFTER running above trend. In 901 observations since 1983, stocks have rallied by an average 0.8 percent over the subsequent 20 days, and 10.9 percent over 250 days.

So momentum begets momentum.

As to the question, "HOW LONG can stocks rally?" Strategist Paul Hickey of effectively tells us "A lot longer." He notes the current rally has lasted 519 days without correcting more than 10 percent. This may sound like a long time, but in fact it's significantly less than rallies in the 90s and mid-2000s. They lasted 2-3 times longer.

We like rising markets, we like out performance even more. Blog readers will recall we highlighted health care as the sector with the highest returns this year on October 17, and retail as the #1 group for earnings growth from a year earlier on September 27. Today, Chris makes the case for embracing cyclicals and small caps, two groups further out on the risk spectrum which have been outperforming since May. He tells clients today these are the groups which will likely rally the most. We include charts of each relative to the S&P 500 Index in order to prove his point.

Finally, we note this morning's stronger-than-expected industrial production (0.6 percent vs. 0.4 percent estimated) and capacity utilization (78.3 percent vs 78.0 percent estimated). They provide two more sign posts of Goldilocks growth: "Just enough" without scaring the Fed. This trend is your friend.

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