Time to Read: 8 Minutes

In our latest webinar, we discussed key factors we consider when determining if a market bottom has been put in, including:

  • Oversold conditions
  • Rally
  • Retest of the lows
  • Breadth thrusts

Here we take a closer look at breadth thrusts and four macro events in November that could spark a rally.

Breadth thrusts: Trust but verify

Strong rallies often start with a high percentage of stocks rallying together. When most stocks are above their moving averages, it’s less worrisome if a few stocks run into trouble—enough stocks should remain in uptrends to support the popular averages. For example, when the percentage of stocks above their 10-day moving averages has climbed above 90%, one year later the S&P 500 has been higher 35 out of 36 cases by a median of 14.2%, as shown below.

S&P Stock Index, 10-18-22

The chart arrows point to instances when more than 90% of stocks have been above their 10-day moving averages. This signal has flashed five times so far in 2022, second only to six times in 2011. The greater frequency of breadth thrust signals in recent years, and especially in 2022, has led us to adapt our mantra from “trust the thrust” to “trust but verify.”

We verify by looking at intermediate-term and long-term breadth measures. For example, the percentage of stocks above their 50-day moving averages fell just short of the 90% signal threshold in August 2022, as shown below. The last time the signal was that close and fell short was October 1973.

Image of S&P Chart

Four macro events in November that could spark a rally

As we have noted multiple times, markets have been in a period of excessive pessimism for most of 2022. One way to look at intermediate-term sentiment is the Ned Davis Research Crowd Sentiment Poll, shown below.

As the chart illustrates, sentiment is typically a contrarian indicator. We are currently at the lowest levels since the early 2020 market bottom. Markets typically perform their best when reversing off an extremely pessimistic reading.

What is needed is a spark to ignite a rally—and we believe four key events on the macro calendar in the span of nine days have the potential to provide that spark:

  • November 2 – FOMC meeting. The Fed is widely expected to raise rates by another 75 bps. For markets, the primary focus will be Chairman Jerome Powell’s press conference. Experts expect Powell will reiterate the Fed’s “data dependent” process and plans to make decisions meeting by meeting. If he suggests rate hikes may become smaller in the near future, markets may rally.
  • November 4 – Employment report. Job openings have declined, yet unemployment claims remain low. Amid reports of staff and hiring reductions, it’s possible that job growth will come in below 200,000 instead of closer to 300,000. If so, markets may infer Fed tightening is softening the labor markets—so long as there isn’t an acceleration in wages.
  • November 8 – Election day. According to polls, legislative gridlock is the most likely outcome. In the second year of a four-year presidential cycle, the one-year period after an election has historically posted the strongest returns of the cycle, as shown below. Additionally, markets generally perform better over the longer term with gridlock.
  • November 10 – CPI report. Markets may find further evidence that we’ve already passed peak inflation. A lower inflation print could be driven by lower input prices, improvements in supply chains, and declines in prices for consumer durables, apparel, and health insurance.

Chart of DOW Presidential Cycle

What this means for BWM Clients?

At BWM Financial, we will be watching each event and the market response to see if any allocation adjustments are warranted. We will specifically be watching for more breadth thrusts and other intermediate-term technical measures to verify that a sustained rally is in place.

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