Author: Kenley Scott

The U.S. market has enjoyed a significant rally since the end of October 2023. On an intraday basis, from the October 27 lows to highs reached two weeks ago, the Dow Jones Industrial Average is up 23%, while the S&P 500 and Nasdaq Composite indices are up 28% and 32%, respectively. We shifted the market status to an Uptrend Under Pressure on Thursday last week as it was the first time the three indices closed below their 21-DMAs at the same time since early January. In that case, the indices retook the 21-DMA within a couple of days and made new highs shortly thereafter, and we moved back to a Confirmed Uptrend. This time, the break was more clear, and although the S&P 500 and Nasdaq were back above the 21-DMA as of Friday, the Dow was not. Should the S&P 500 and Nasdaq indices settle back above the 21-DMA for a few days, we could upgrade the market, while another break below the 21-DMA would leave a 50-DMA test likely.

Looking at bull markets from the post-WW2 era-on, we noted two weeks back that the current bull market is not exceptional in terms of its gain to-date. On both the DJIA and the Nasdaq Composite, it is well below the median performance through the first ~17 months. However, there have already been some huge winners. Here we will take a look at how some of these cycle winners compare with what we call “model book” winning stocks of past cycles (using DJIA). For winning stocks, we used buy points as a breakout from some sort of consolidation while the peak of the move is the high before a base or long-term moving average is undercut.

Key points:

• Global index (VT) rallied 17% over 19 weeks from March to July 2023 before pulling back 12% from July to October 2023. It has most recently enjoyed another 19-week rally, this one larger in proportion, +24% to recent highs.
• U.S. and Technology leadership has wavered just slightly. Leading Nasdaq 100 is actually down over the trailing five weeks. In that period, ACWX, IWM, EEM, and EFA have all picked up a bit of relative ground (versus the S&P 500).
• As the U.S./Tech dominance has unfolded, it has created a rare imbalance, as seen in the O’Neil Sector Rotation graph. On a global basis, Tech and Retail are outperforming, Financials are midrange, and all other sectors are underperforming over the long term (defined as trailing six months in this graphic).

Key Points:

• It may come as a surprise, but the current bull market is actually off to a slow start relative to history, even for the leading Nasdaq Composite. After 17 months-in, the median % gain for the DJIA is 40% vs 32% currently, and 72% for the Nasdaq vs 51% currently (using daily closing low price). The start lines up most closely to the 2002 bull market.

Key Points:

• Median Q4 2023 S&P 500 sales/EPS growth of 4% and 7%. Sales/EPS beats of 1% and 4% in-line with history. +3% median reaction since day of earnings.
  • Cyclical, Tech, Cap, Util best EPS growth. Cyclical, Financial best beats.
  • Materials, Cap, Retail best reactions.
• In terms of 2024 EPS revisions, slightly more (53%) positive, but overall median 0% revision.
  • Cyclical, Staple, Retail, Utility most positives. Transport, Health Care most negatives.
  • Cyclical best magnitude of positive revisions. Energy worst of negatives.
• Filtering through the Q in two ways:

1) Those with exceptional current growth and strong reactions to results versus those with weak growth and weak reactions.

• • >10% Q4 sales/EPS growth, beats on both, positive reactions=38 stocks. Most extended. Still near pivots incl. GRMN, CME, SNPS, FTNT, QRVO.
  • <0% Q4 sales/EPS growth, misses on both, negative reactions=14 stocks. Incl AFL, ZION, BIIB, D.

2) Those with significantly positive or negative 2024 EPS estimates revisions and outsized reactions to earnings (not incl in #1).

• • >5% 2024 EPS revision and >5% positive reaction. Still near pivots incl. NUE, STLD, GM, DIS, QCOM, AAL.
  • <5% 2024 EPS revision and negative reaction. Below but within 7% of 50-DMA incl. RHI, GNRC, SWK, APA, PYPL, PAYC, INTC, UPS.