The pullback has gone from narrow to widespread…

Stocks have fallen across the board. Everything from the technology sector to transportation stocks has dipped recently.

You can see this by looking at “market breadth.” That’s a way of gauging when lots of stocks are doing well, not just a few. It can also show when a downturn is widespread.

Today, market breadth is at one of the lowest levels in years. But that could change soon.

You see, today’s breadth readings are at a crucial level. And while the market seems risky, this means the S&P 500 Index is actually poised for a 13% rally from here.

Let me explain…

It seems like a bad time to bet on a market rally. Sure, prices ended last week slightly higher. But all of the problems that drove stocks lower to begin with are still around.

That’s what we see on the surface. But if you dig a little deeper, the opportunity becomes clearer.

Specifically, we’re looking at the McClellan Summation Index…

This index tracks a basket of U.S. stocks. Each day, it subtracts the number of stocks moving lower from the number of stocks moving higher.

If more stocks are up than down that day, the index ticks upward. But when the majority of stocks are dropping, the index falls.

Normally, we want this index to be moving higher. That indicates a broad market rally is underway. But an extremely low level is worth noting, too…

That’s because nothing falls forever. Eventually, a few more stocks will go up than down.

If you can peg when that’s likely to happen, you can make money in stocks. The McClellan Summation Index could be getting to that point today. Take a look…

Market breadth is at its lowest level in two years. You can also see that today’s reading is extremely low relative to history.

Recently, the McClellan Summation Index dropped below a reading of negative 1,500. To see what that means for stocks, I looked at what the S&P 500 has returned after this indicator has fallen below that level in the past.

While only 10 other cases like this have happened since 2000, the results are impressive. Check it out…

Buying the S&P 500 when market breadth is this low has led to major outperformance… more than double a simple buy-and-hold strategy.

Previous setups led to 7% gains in six months and a 13% gain over the next year. This means that the recent drawdown could be ending. And if it does, big upside will likely follow.

In short, history shows this is a promising trade setup. Prices are already starting to rise a bit as well. And if this pattern bears out, we’ve likely only seen the start of a larger rally.

Good investing,

— Chris Igou

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Source: Daily Wealth