This market strategist says stocks could gain 8% to 15% from here — giving anxious investors a perfect opportunity to sell

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The US stock market’s huge decline on May 5 actually boosts the odds of a strong rally beginning soon, even if it won’t kick off a new leg of the bull market.

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That’s according to Hayes Martin, president of advisory firm Market Extremes, Over the years I have reported on Martin’s predictions of market turning points, which overall have been impressive. (For the record: Martin does not have an investment newsletter; my newsletter-tracking firm does not audit his investment performance.)

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It was just a week ago that I checked in with Martin, who at the time said that a strong countertrend rally in the 8% to 15% range could begin soon. I reached out to him again midway through the trading session on May 5 to see if his projections had changed in the wake of the Dow Jones Industrial Average DJIA,
-3.12%
gaining 932 points on May 4 and then giving all of it back (and then some) the following day.

Martin said the net effect of the recent huge swing is to increase his confidence that this 8% to 15% rally could begin soon. “We’re getting closer with today’s action,” he said.

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One reason for his increased optimism is what he terms “bottom divergences”— by which he means occasions in which the market as a whole is being stronger than would appear when focusing on the market averages alone. Bottom divergences have bullish significance, just as their opposite — top divergences, when the market averages are painting an unjustifiably rosy picture — are bearish.

Martin’s assessment that bottom divergences have become stronger in recent sessions is based on a number of indicators, and it’s beyond the scope of this column to review them. But a good illustration of Thursday’s bottom divergences comes from comparing the performance of the S&P 500 SPX,
-3.56%
(which is capitalization-weighted and therefore dominated by the highest-valued stocks) with the equal-weighted version (as represented by the Invesco Equal-Weighted S&P 500 ETF RSP,
-3.01%,
In trading Thursday, the equal-weighted version was outperforming the cap-weighted version by 0.6 of a percentage point.

Similar divergences were evident in other parts of the market as a well. The equal-weighted ETF version of the Nasdaq 100 index QQEW,
-4.65%
was beating the cap-weighted version QQQ,
-5.04%
by 0.4 of a percentage point, for example.

Martin reiterates the cautionary advice he provided a week ago: Don’t get carried away if and when the market rallies. It’s most likely a counter-trend rally within a bear market, not the beginning of a new leg of the bull market. Martin’s best guess is that the rally will “provide another selling opportunity” to reduce equity positions.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]

More: Why did the Dow plunge more than 1,000 points? Should I wait for stocks to sink lower? Here’s what some pros think.

Also These 13 Nasdaq-100 stocks had the biggest swings up and down after the Fed raised rates. Should you be scared off?

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Credit: www.marketwatch.com /

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