There’s a bullish case on stocks that’s not gained much traction yet. With another 4%-5% upside in the S & P 500 , the thesis would demand serious attention. It goes like this: “The market bottomed exactly three months ago in October, the most common month for bears to expire, just ahead of a midterm election, which history says ushers in the best year of the presidential cycle.” “The low came on a bad CPI report but the reflex sell-off was immediately reversed as the market sniffed out that inflation had peaked and with it the Federal Reserve’s hawkishness.” “Since then, the S & P 500 is up almost 15%, the US Dollar Index has rolled over by 10%, Treasury yields are screaming that inflation is last year’s war and that the Fed is just about done. Cyclical sectors have begun outperforming and credit markets are firm, as the market prices in higher odds of a benign economic path from here.” “Wall Street sentiment was subdued to start the year, and previously eviscerated speculative stocks have surged in January, a sign that investors feel underexposed to risk. The Volatility Index has been hard to rattle for two months and closed Friday at its lowest level since just after the market peak, a sign the market’s character could be shifting to greater stability.” It’s a plausible and potentially compelling story which, like a legal brief, is rooted in fact but presented from one side in order to persuade. Exhibit A placed in evidence could be the chart of the equal-weighted S & P 500 index, which is up close to 20% from its October low and has burst above its 200-day moving average. It shows the core of the market, the rank-and-file, looking sturdier than the headline benchmark, which just on Friday barely nosed above its 200-day average and still must prove that it can surmount the downtrend line from the ultimate peak set a year and ten days ago. ‘Breakaway momentum’ Walter Deemer, a celebrated technical analyst who began work on the Street almost 60 years ago, has a market-breadth indicator calculated over ten days meant to flag potential important trend changes. On Thursday, he declared on Twitter: “The stock market generated Breakaway Momentum today for the 25 th time since 1945. It means (IMHO) we’re in a bull market. How long it lasts, and how far it carries, is something we will know only in the fullness of time.” The previous signal was in mid-2020, and before that early 2019 and 2016 as the market came off significant lows. Forward returns following past triggers were overwhelmingly positive over six- and 12-months, with some near-term downside chop over shorter time frames at times. .SPX 5Y mountain S & P 500, 5 years Leuthold Group tracks a similar “super-overbought” reading in its ten-day Moving Balance Indicator, which has similarly positive forward implications based on the prior dozen instances since the 1960s. Average further gains of 4%-8% have tended to follow over one to three months. Leuthold Chief Investment Officer Doug Ramsey says prolonged bear markets can cause some false signals, and — perhaps counterintuitively — the indicator is most powerful when it occurs during a recession (not the case currently). He says if the S & P 500 were to back off more than 5%-6% over the next several weeks, it would represent a technical “failure — one that might herald the economic event that is still missing from the picture.” Such an economic event could, for sure, be the economy sputtering in a broader and more worrisome way than it has so far, should the leading indicators of recession (ISM surveys and the inverted Treasury yield curve) give way to weaker spending and employment. Indeed, the past year has seen several so-called “breadth thrust” signals of various types prove faulty or premature. Whether a quirk or a result of current automated-trading dynamics that drive short-term “all-inclusive” buying bursts, the recent record argues for reserving judgment on a potential trend change. A Fed pause? Warren Pies, a cofounder and strategist at investment-analysis firm 3Fourteen Research, came into the year suggesting stocks could celebrate an imminent pause in the Fed’s tightening efforts, in line with the typical pattern. “Historically, pauses are bullish. In general, they occur well before an associated recession (on average about a year away). With the Fed backing off and the economy still chugging along, stocks typically bask in the goldilocks of a pause.” Seen this way, the green shoots of a reborn cycle might be more a January thaw , one that can last for months, yet still an interim phase of relief before the chill returns. Bonds, in particular, tend to flourish around such a pause and indeed fixed-income markets are enjoying the recent avid embrace by investors of Treasuries and corporate debt, compressing yields and credit spreads. Among the risks here is that an equity rally itself could forestall any pause, Pies suggests, which brings with it the hazard that the hoped-for softer economic landing becomes less likely. Much has been said, understandably, about the apparent gulf between the market’s implied forecast (for the Fed to be cutting rates by the end of the year) and the Fed’s (preaching “higher rates for longer”). Yet the market must price in a range of probabilities, which include the chance that inflation crashes quickly or an economic accident forces the Fed to reverse itself. Fed officials are simply conveying their current intentions, overlaid with the messaging they think will best keep markets in line with their goals. 1995 comparison An exception to the tendency of a Fed pause to precede a hard landing — the shining, extraordinary episode the bulls like to invoke above all others — is 1995. Early that year, the Fed halted a year’s worth of rate hikes with a final half-percent bump, engineering an economic slowdown and some bond-market carnage but no recession, after which the economy did fine and stocks began to levitate into the late-’90s investor nirvana. (I detailed the 1994-’95 experience in a column last March .) There are many differences in the backdrop today compared to then — the Fed was pre-empting an inflation outbreak then, and has been chasing one this time, for one thing. But some of the market rhythms are similar, at least enough to sustain some marginal hope. Hunting for the answers in the macro and market outlook means tracking moving targets through blurry scopes. The cadences of this cycle are a bit scrambled: For instance, the inverted yield curve should be bearish for risk assets. But this time, the S & P 500 had fallen 20% by the time the 10-to-2-year Treasury curve inverted, whereas in past cycles stocks were near a high. There are several crosscurrents in the market action to start the year that also create some ambiguity. Stocks have had a good run off the low three months ago, but Strategas Group’s Chris Verrone notes that gold has done better than the S & P 500, which if Oct. 13 was the true low would be a first. @GC.1 3M mountain Gold futures, 3 months Industrial materials stocks are flying on a lower dollar and China reopening hopes, but so are shares of busted unprofitable tech companies and heavily shorted meme stocks, possibly just the usual revival of the laggards in January. Some constructive hints that investors are making use of a fresh “risk budget” at the start of the year, but much is yet to be proven. The S & P 500 probably needs to reach 4300 — up another 7.5% — to make a solid case for the bear market being over, says John Kolovos of Macro Risk Advisors. “Peak inflation” has steadied the tape, but the valuation reset likely didn’t go deep enough to set up years of superior equity returns, as most bear markets have done. In such times — or, for that matter, all the time — perhaps it makes sense to stay involved and keep expectations in check, leaving room for pleasant surprise if the verdict goes to the bulls.