Ned Davis: The Cyclical Bull Rally is Not Over

Ned Davis

In February of last year, Ned Davis, president and senior investment strategist of an eponymous Florida-based institutional research firm, correctly forecast last year’s market decline. In February of this year, he called the market rally that began in March. 

Now, he says, that cyclical bull rally is not over.

Davis, who is in his fifth decade as a market forecaster, spoke at last week’s Financial Advisor Symposium in Orlando, Florida.

Synthesizing technical, fundamental and macroeconomic analysis, Davis identified seven indicators that correspond to secular market lows.  Most of those are not in place, and he offered a neutral long-term forecast.

The cyclical bull market is not over

“I do not like to fight the tape,” Davis said.  His “Big Mo” indicator, which measures momentum across 100 industry segments, had reached an extremely bullish level of over 90 at the end of October, but it has since receded to 85, which Davis said is “moderately bullish.”  This level is consistent with a cyclical bull market, he said. 

Another very bullish indicator, according to Davis, is the recent steep fall in corporate bond yields. Such declines typically coincide with rising equity prices. 

Davis’ reading of market sentiment, however, gives a slightly different signal.  Noting that points of extreme investor pessimism typically coincide with the onset of market rallies, he showed that his sentiment indicator reached its lowest point (30.9) in March, a very bullish signal.  That indicator now is 60.0 and signifies optimism, suggesting that investors should “take some money off the table.”

Another bullish signal is that stocks do well when inflation is low.  Davis presented data showing that stocks gained 18.1% when inflation was under 1%, 8.7% when inflation was 1% to 4%, 1.2% when inflation was 4% to 9%, and 0.7% when inflation was over 9%.  His data reach back to 1947, and thus do not include the deflationary periods during the Depression, which many claim closely resemble today’s environment. 

“A strong tape, corporate yields still falling, sentiment not showing extreme optimism, and low inflation are a pretty bullish signal,” Davis said, adding that “at this point in time we don’t have any evidence that the cyclical bull market is over.”