Rally has room to run, so take more risk

  • According to Ned Davis Research, investors should start taking more risk and buying consumer durables.
  • The research firm said several indicators indicate that the current stock market rally will continue.
  • “We will probably take another step towards growth [stocks] on additional model confirmation,” NDR said.

In the first half of 2022, the pain of growth stocks was the gain of value stocks, but now that trend is set to reverse as the stock market continues its rally from its June 17 low.

That’s according to Ned Davis Research, who said in a note Thursday that investors should take on more risk as “several indicators suggest the rally could have room to run.”

Those indicators include buy signals in NDR’s internal Big Mo Tape and another round of broadside bumps, which follow momentum and occur when a high percentage of stocks rise together.

A series of strong technical broadside bumps suggest momentum is building across sectors, increasing the likelihood of the stock market continuing to rise.

“The sector model … now favors growth sectors over value sectors for the first time this year … we will probably take another step towards growth [stocks] on additional model confirmation,” NDR said.

To express its view that now is the time to take more risk, NDR has moved the more volatile consumer discretionary sector to overweight at the expense of more defensive sectors such as utilities, healthcare and materials.

The two largest positions in the consumer discretionary sector are Amazon and Tesla, and their recent outperformance suggests the sector is poised to continue higher, the note said.

“Both [Amazon and Tesla] are now approaching relative golden cross signals that have historically been consistent with strong consumer cyclical outperformance.

Ultimately, NDR admits that the continuation of the stock market rally will depend on the Federal Reserve’s ability to orchestrate a soft landing in the economy. But there are more signs today than a few weeks ago that it remains a possibility.

Inflation cools as oil prices fall, as shown by the July CPI report and recent data on import/export prices. Meanwhile, despite higher mortgage rates, the housing market is showing signs of a soft landing. Taken together, this could give the Fed more flexibility in slowing down its rate hike trajectory.

But if inflation doesn’t fall, all bets are off.

“If inflation fails to fall meaningfully and the Fed has to remain aggressive throughout the year, the risk of a Fed-induced recession will increase… [and] defensive leadership was expected to return,” concluded NDR.

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