Author: Kenley Scott

Key Points:

• Large-cap indices have clearly risen into 52-week highs, with the Dow at all-time highs. Small/midcaps are testing key resistance from prior peaks over the past 15 months.
• Breadth (stocks above 30-WMA) has risen from below 20% to nearly 75% in seven weeks. Peak in breadth tends to come between 75–85%, with exceptional cases ~90%.
• Russell 2000 joining in has been the largest factor in rising breadth. Looking at the Russell, it has risen ~20% in seven weeks.
  • Since 1987, a 20% rise over the trailing five-week (35 trailing days) period is rare, occurring less than 1% of the time. Also, many of the instances were bunched together (mostly in 1991, 2009, and 2020).
  • When this occurs, forward returns have been exceptional.

Key Points:

• Another strong week of breakouts last week, following a large spike two weeks ago.
• Looking back at the past 23+ years, when a spike in breakouts occur, it tends to fit in three categories:

1.    Market uptrend beginning or ongoing.

a.    Key here is solid 4-8 week forward gains and additional breakout spikes soon thereafter. Ex: November 2016.

2.    Headfake occurring.

a.    Most likely breakdown evident within a few weeks. Ex: May 2001.

3.    End to longer rally occurring.

a.    Longer topping process, but within 3 months should be evident. Ex: November 2021.

Key Points:

• Revisiting FTD study.
• On the S&P 500, there have been 34 corrections of at least 9% and to below the 200-DMA since 1970. Of these:
  • Scenario One – Eighteen had a first FTD, which resulted in the continuation of the bull market and eventual new highs.

Key Points:

• Rally of the past two weeks has led to a net gain for indices as well as the median stock post-Q3 earnings report.
  • Unlike the setup of Q1 and Q2, the market sold off into earnings this quarter. Despite starting with losses in the first couple of weeks of reporting, the S&P 500 is now up a net of 2% since earnings began.
  • The median S&P 500 stock is also up about 2% since reporting earnings.
• In terms of Q3 results, those with both the biggest beats and biggest positive reactions include Capital Equipment, Consumer Cyclical, and Technology. Energy and Transportation have had the only negative reactions.

Key Points:

• Downtrend worsens into last week’s end. U.S. indices were down at least 2.5% apiece and smallcaps were making new cycle lows.
• As written about for a couple of the last few weeks, the potential for a big bounce in oversold areas certainly exists (Health Care, Staple, Utility, smallcap, solar, medtech, etc.), in which case, would look for a follow-through day to begin that process.
• But, also want to focus on improving relative strength in the downtrend. Among the ways stocks emerge as leaders:
  • 1) RS improvement during downtrend and continued outperformance once the market turns. For example, Elf Beauty (ELF) since May 2022.
  • 2) Poor RS during downtrend, but immediate leadership from the market turn. For example, Nvidia (NVDA) since October 2022.