• According to Ned Davis Research, the market just sent investors three optimistic signals.
• Strategists pointed to the 40-day trading index, the daily momentum model and the number of 10:1 up days.
• These indicators suggest short-term upside potential for stocks, but valuations appear stretched over the long term.

According to Ned Davis Research, the market has just sent a handful of optimistic signals that suggest stock prices are headed even higher.

In a note Monday, the research firm’s strategists pointed to three positive signals that emerged last week following a sharp sell-off earlier in the month.

The first signal, the 40-day trading index, indicates a bullish reading when “crowd trading extremes” suggest that an upward move in stocks is the “path of least resistance.” The indicator gave indications that stocks were oversold last week, which has historically been followed by gains in the market 60% of the time since 1981, NDR strategists said.

The second signal, the 10:1 up day, flashes when the number of advancing stocks exceeds the number of declining stocks by a ratio of 10:1. Stocks posted their eighth 10:1 up day in August since last November, strategists said, a pattern that is “consistent with above-average returns” for the next 6 months.

The third signal, the company’s Daily Momentum Model, indicates a bullish reading when at least 65.5 percent of the company’s 94 short-term momentum indicators turn positive. Last Friday, the model’s reading was 68.6 percent, a reading that has typically resulted in an average annual gain of 10 percent since 1979.

These short-term indicators appear to have confirmed the “bullish message” for stock prices, the strategists added, noting that other indicators of market breadth have remained “generally unfazed by the recent pullback” in stock prices.

Still, the company warned investors about the longer-term outlook for stocks, saying valuations still appeared “overstretched to the upside,” the note said – in line with other market commentators who have warned that an AI-fueled bubble could make the market’s biggest stocks overvalued.

According to elite investor John Hussman, one valuation measure suggests the market is at its most overvalued since 1929.

“To be more cautious, the sell-off has done little to defuse the stretched long-term trend and valuations,” said NDR strategists. “While the market may overshoot as it did in 2000, the chart suggests that both the long-term trend and valuations remain stretched to the upside.”

Despite a brief spike in recession fears, investors are generally positive about the outlook for stocks. According to the AAII’s latest investor sentiment survey, 43% of investors said they were optimistic about stock prices over the next six months, up from 41% the previous week.