MARKET ROTATION VERSUS TOP AHEAD AS GROWTH GIVES WAY TO VALUE

Like the narrator of the classic poem, this bull market’s journey may not be over yet, according to analysts at Bank of America Merrill Lynch.

The stock market has defied trade-war fears and Turkey’s currency woes to notch up healthy gains this month, neutralizing August’s reputation as a weak month for equities. Instead, all three indexes have rallied more than 1% month to date as the market gets ready to celebrate its coronation — at least by some measures — as the longest bull market on record this week.

That stellar performance has triggered some nervousness over whether the market’s upside momentum that has carried major benchmarks toward record highs is about to fizzle out.

But Stephen Suttmeier, a technical research analyst at Bank of America Merrill Lynch, is among those who remain upbeat on the market’s prospects.

The chart watcher said that the strength in the market’s breadth, as gauged by a record high in the S&P 500’s NYSE Composite Advance-Decline line last week, indicated that stocks have a long way to go before hitting a wall.

“This suggests market rotation and not a market top,” Suttmeier said. “Given the debate about growth topping out relative to value, we find it interesting that the A-D line for both Russell 1000 Growth and Russell 1000 Value hit new highs last week.”

Suttmeier is referring to the very popular, and to-date lucrative, investment strategy of focusing on growth-oriented shares versus those viewed as relative bargains. Since March 2009, which many pinpoint as the birth date of the current bull market, the iShares Russell 1000 Growth ETF IWF, +0.68%  soared 329%, while the iShares Russell 1000 Value ETFIWD, +0.39%  has jumped 215%, according to FactSet.

The Dow Theory, which posits that strength in both the Dow Jones Industrial AverageDJIA, +0.57% and the Dow Jones Transportation Average DJT, -0.43%  means strength for the market, also suggests that the bull market is hale and hearty despite its longevity.

“The Dow Theory reconfirmed its buy signal on Friday with new highs for both the Dow Industrials and Dow Transports off the lows from February, April, and June,” said Suttmeier.

The volatility backdrop is encouraging as well. The Cboe 3-Month Volatility IndexVIX3M, -3.59% and the Cboe Volatility Index VIX, -1.21%  ratio is holding at 1.10, which is serving as a key support, according to the technical analyst. As long as this ratio remains above 1.10, then the S&P 500 SPX, +0.53%  will likely be able to trade above 2,800 and potentially test new highs.

The U.S. market’s relative strength against the rest of the world is another point in its favor with the daily global advance-decline line of 73 country indexes showing signs of topping out. In previous incidences, when global breadth weakened, the U.S. tended to outperform foreign markets.

Going forward, even if the market’s technicals deteriorate and the S&P 500 runs into trouble, its ability to find underlying support, or buying interest, between 2,831-2,827 will determine whether it will be able to test 3,000 by 2019.

Fundamentally, U.S. stocks may have robust financial performance to thank for their fortitude. With 86% of S&P 500 companies having reported quarterly results, second-quarter earnings are up more than 24% year-over-year while sales grew more than 9%.

It may also be worth noting that none of Bank of America’s sentiment barometers—including the Bull & Bear indicator as well as the Sell Side indicator—point to a top in markets as of yet.

Meanwhile, J.C. O’Hara, chief market technician at MKM Partners, said market sentiment is just right — not too hot nor too cold.

MKM Partners

“As the S&P 500 approaches the highs made in January, we find the current sentiment is not as excessive as it was then. Looking at the AAII Bulls, Bears and Neutral, our sentiment model is in neutral territory,” he said in a note.