• The NYSE McClellan Summation Index suggests strong underlying breadth in the stock market.

• The signal is thought to have a perfect record when it flashes while the stock market is soaring.

• It had flashed 28 times since 1962, with the S&P 500 averaging 15% returns a year later.

A bullish signal that flashed in the stock market this week for only the 29th time since the 1960s suggests a year of record highs are ahead.

Data from SentimenTrader indicates the NYSE McClellan Summation Index completed a cycle from below 100 to above 1,000, suggesting that underlying breadth in the stock market is strong.

The index is derived from the McClellan Oscillator, a closely followed indicator that measures participation in the stock market. The tool helps traders determine the underlying strength or weakness of a market trend.

Dean Christians, a senior research analyst at SentimenTrader, says the bullish signal is worth following.

"Similar improvements in market breadth resulted in a 96% win rate over the following year," Christians said in a note to clients on Tuesday.

But the signal has a perfect win rate when it flashes while the stock market is at or near record highs, as it did this week.

"Signals within 2% of a high have never experienced a loss over the next two, six, and twelve months," Christians said.

SentimenTrader says this rare signal has flashed only 28 times since 1962, not including this week's signal.

The last time it flashed was in December; since then, the S&P 500 has surged by about 20%.

Among the 28 instances, the S&P 500 has delivered an average return of 5%, 9%, and 15% in the following three, six, and 12 months.

A 15% gain from current levels would send the S&P 500 to about 6,600 by this time next year, meaning many record highs are likely ahead if the signal plays out.

"Typically, when stock indexes consolidate, as most have since July, market breadth weakens as lagging moving averages or pivot points catch up to price," Christians said. "However, that's not the case now, as breadth has remained firm and even improved depending on the index or exchange."

The improvement in market breadth over the past few months is evidenced by the fact that the equal-weight S&P 500 index is trading at record highs and has been up by nearly 10% since July, while the mega-cap growth stocks have been about flat over the same period.

Read the original article on Business Insider