The stock market rally has room to run and investors should start taking on more risk, Ned Davis Research says

The stock market's rally off the June 17 low is expected to reverse the trend of growth stocks' pain being value stocks' gain.

According to Ned Davis Research, the rally could have room to run and that investors should start taking more risk.

The indicators include buy signals in NDR's internal Big Mo Tape and another round of breadth thrusts, which can be seen when a high percentage of stocks rally together.

A string of strong technical breadth thrusts shows that the stock market is moving in the right direction.

NDR said that the sector model favors growth sectors over value sectors.

NDR upgraded the consumer discretionary sector to overweight in order to express its view that now is a good time to take on more risk.

According to the note, the recent out performance of the top two holdings in the consumer discretionary sector suggest that the sector is poised to continue higher.

NDR said that both Amazon andTesla are close to golden cross signals that have been consistent with strong out performance by consumer discretionary in the past.

NDR concedes that the continuation of the stock market rally will depend on the Federal Reserve's ability to smooth out the economy. There are more signs that it's still possible.

Inflation is cooling off due to the fall in oil prices. Despite higher mortgage rates, the housing market is showing signs of stability. This could allow the Fed to slow down its interest-rate-hike trajectory.

All bets are off if inflation continues to rise.

The risk of a Fed-driven recession will grow if inflation fails to meaningfully fall and the Fed must remain aggressive.