"Five Weaknesses and Six Breakdowns" No Longer Works? US Stocks Rebound Strongly, Technical Indicators Release Positive Signals

"Sell in May and go away," this old Wall Street adage seems to be ineffective this year. Despite market turbulence in April due to the Trump administration's tariff increases, U.S. stocks quickly rebounded in May, surprising many investors. Technically, a series of positive signals are indicating that this rally is likely to continue throughout the summer.

According to the Zhitong Finance APP, Adam Turnquist, a technical strategist at LPL Financial, pointed out that the breadth of the stock market rebound is one of the key indicators of whether this rally can be sustained. From a technical perspective, this rebound has far exceeded the standards of a short-term "bear market rally."

The Advance-Decline Line of the S&P 500, a broad indicator measuring the ratio of advancing to declining stocks, climbed back to historical highs in May after briefly dropping to its lowest point since January in April.

Turnquist stated, "This is one of the most convincing technical signals, indicating that the current rally is more likely a healthy bull market rather than a fleeting rebound."

Market breadth is one of the key indicators for assessing market health, typically referring to whether the number of advancing stocks is sufficiently large and distributed across multiple sectors. At the beginning of 2023, the market's rise relied mainly on a few large tech stocks, leading to poor market breadth. However, this situation has seen a significant change in 2024.

According to Turnquist's data, currently, 60% of S&P 500 constituents are in an upward trend, a proportion even higher than on February 19 when the S&P 500 set a new closing high. On April 8, this proportion was less than 30%.

The performance of tech stocks has been particularly impressive. At the beginning of May, the proportion of tech stocks in an upward trend was less than 10%, but by last week, this proportion had soared to 88%. Given that the tech sector accounts for more than 30% of the total market capitalization of the S&P 500, its strong return is significant for the overall market trend.

Another rare but closely watched technical indicator, the Zweig Breadth Thrust (ZBT), also emerged at the end of April, further confirming the sustainability of the market rebound. ZBT is a strong bullish signal, and its occurrence typically indicates that the market has recovered from a deep correction.

Since then, market breadth has continued to improve. By the end of May, 10 out of the 11 sectors of the S&P 500 had achieved gains, and the tech sector had almost completely recovered its losses since the beginning of the year.

Market optimism is not limited to the U.S. Robert Sluymer, a technical strategist at RBC Wealth Management, noted that the German DAX index and the Canadian TSX index reached cycle highs in May, indicating that global stock market participation is also on the rise He believes that this phenomenon usually does not occur in a "bear market rally," but is more inclined towards the continuation of a bull market. He predicts that there is still upward space in the market for the next one to two months until it enters a clearly overbought area, at which point a new consolidation period may occur.

Despite the generally favorable technical indicators, investors still need to remain vigilant. Sluymer reminds that the participation of small-cap stocks in the U.S. is still relatively low, and this weakness needs to be closely monitored.

In addition, whether the 10-year and 30-year U.S. Treasury yields will break through the trading range of the past two years and rise is also one of the risks the market may face in the future. A surge in yields could put pressure on stock market valuations.

Callie Cox, chief market strategist at Ritholtz Wealth Management, stated that investors are still waiting for a clear "recession signal," and the U.S. labor market data to be released by the Department of Labor this week could be a key turning point. She pointed out that it is still unclear whether "that moment" will actually arrive, but if the data shows that the labor market continues to weaken, the stock market may face short-term shocks