Seller beware: Why new market signals may make sellers think twice

• Bitcoin’s price surge may indicate a renewed investor appetite for risk.
• Breakaway momentum — a relatively rare event that has historically been followed by generally strong stock market performance — is back.
• These market indicators are at odds with the consensus, suggesting that better days may lie ahead.

You’ve probably heard the phrase caveat emptor (buyer beware) invoked to caution prospective purchasers, but does anyone think about caveat venditor for sellers? Given the state of today’s markets, investors thinking about exiting equities might want to heed these words of warning.

Why? For starters, let’s question the consensus view. Conventional wisdom says the US is on the cusp of a recession that will likely push stocks lower, fueled by slowing economic data, loosening labor markets and aggressive rate hikes over the past year. In this scenario, analysts continue revising corporate earnings forecasts downward and valuation multiples contract, giving further oxygen to the bear market that’s been in place since last year.

During times like these, with a potential recession looming, some investors may be tempted to reduce equity exposure. Longer-term investors might tend to ignore this advice, since trying to time allocations can often be unsuccessful. But there are even tactical reasons to reconsider selling stocks, given several recent developments.

Whatever you think about cryptocurrencies, there’s probably no better barometer of risk appetite in financial markets than Bitcoin. There is little to distort its use as a risk proxy: It has minimal practical utility, only modest idiosyncratic risk (aside from now-expected levels of recurring fraud) and no real end-market vagaries (supply response, sovereign issues, etc.). Many investors seem to buy crypto when they’re feeling good about the future and sell it when they get more fearful.

For these reasons, Bitcoin’s recent technical break above its 150-day moving average is notable, particularly since it hasn’t happened since fall 2021 (Exhibit 1). Over time, Bitcoin’s price movements tend to loosely coincide with movements in the S&P 500 — which also recently jumped above its moving average (Exhibit 2). So although it’s probably not a great idea to make equity decisions based on crypto prices, Bitcoin’s movements should at least be respected. It’s difficult to envision a scenario in which investors are buying crypto while avoiding stocks and other risk assets.

Another notable consideration is that January’s surge was broad-based. In what Wall Street calls a “breakaway momentum signal,” the number of advancing issues was nearly double the number of declines during the month. This is extremely rare. In fact, in the last 70 years, there have been only 24 occasions prior to January 12, 2023, when advancers outpaced decliners by two to one over any 10-day period (Exhibit 3).

Following these breakaway events, the market’s subsequent performance has told an interesting tale: Although short-term reactions have been uneven, the S&P 500 returned an average of 7.9%, 14.0% and 20.7% over the ensuing 3, 6 and 12 months, respectively. In only a few instances did the S&P 500 have a negative return for the 12 months after a breakaway — and even then, declines were modest.

What might these two signals be sniffing out? We see three possibilities, which could be working in any combination to reset the market’s expectations:

• A potential pause in rate hikes
• A more resilient US economy
• Reignition of global growth triggered by the reopening of China’s economy (following relaxation of Covid restrictions)

Whatever is driving these signals, they are at odds with the consensus. The fundamental tea leaves continue to indicate a possible recession and an equity market reckoning. But for the first time in a while, the internals of the market are behaving in a manner that suggests better days ahead.

The consensus may continue to dismiss the recent rally as some unholy progeny of a position-driven short squeeze and the time-honored January effect. Those who follow this line of logic are likely to sell the rally’s prime beneficiaries. To them, I retort caveat venditor and urge them to look at the emerging mosaic of technical conditions that point to a potential new bull market.

This caveat may even kindle a desire to marginally increase exposure to more economically sensitive equities, particularly if the rest of the market pulls back in response to the broad-based breakaway we’ve been seeing.

It is, of course, perfectly understandable to dismiss the Bitcoin and breakaway signals — and no one is suggesting making investment decisions based on two data points. But it’s hard to look at the above exhibits and have confidence that est aliud hoc tempus — it’s different this time.