After three months of negative returns, investors in U.S. stocks began November with a strong trailing day (FTD) on November 2, 2023, when the S&P 500 rose 1.9% on higher daily volume . O’Neil Global Advisors (OGA) defines an FTD as:
- Daily gain on a major country benchmark index greater than 1.7% on at least the fourth day after market lows are established, and
- On a higher volume than the day before.
Conversely, OGA defines a negative Distribution day as a daily loss of -0.2% or more on higher volume than the previous day.
Although FTD’s success is only visible in hindsight, we hope that the market’s recent gains will mark the end of the market’s decline and the start of a new, longer-term rise. This is because the Fed may have ended its tightening cycle and US long-term interest rates may have peaked. Additionally, U.S. corporate profits improved year-over-year in the just-completed third quarter.
Although not every FTD results in strong gains over time, every significant market rally tends to start with an FTD. The keys to a successful FTD include immediate price gains and minimal distribution days in the following days and weeks, positive behavior within the group and stock management, and the emergence of new securities and leadership groups. On the other hand, FTDs that fail tend to exhibit signs of difficulty, including several days of distribution shortly thereafter, and the inability of market leaders to make significant progress.
Three timeless quotes from our founder William J. O’Neil illustrate our investment philosophy regarding FTDs.
“An FTD should give the feeling of an explosive, strong, decisive and conclusive gathering, without hesitation or hesitation. »
“…the first thing I learned about how to outperform is not to buy stocks that are near their lows, but to buy stocks that are coming off broad bases and begin to reach new heights.”
“My philosophy is that all actions are bad. There are no good stocks unless their price increases. If they go down, you need to cut your losses quickly. Letting losses run is the biggest mistake most investors make.
The first two quotes are particularly relevant now that we have had FTDs in many global markets, including the United States. The second concerns the profile of the stocks that we currently wish to buy. The latest quote is for markets like the July-October 2023 period where the general market is down (-11% for the S&P 500) and the median stock is down much more significantly (the median stock was down over 30% compared to 52-week highs). October lows). This will remain relevant going forward: stocks that weaken if general market strength continues are good candidates for reduction or sale.
The keys to American rallying
The two key conditions to make this a sustainable rally are FTDs and market breadth. Here are more details on these two requirements.
1) FTD on major indices
- In the United States, the S&P 500 and Nasdaq Composite indices generated FTDs on November 2.
- Interestingly, these were preceded by FTDs on the Russell small and mid cap indices on November 1st.
- The volume on each of the indices was much higher than the previous day in each case, giving a conclusive impression.
- Additionally, last week, each index generated a secondary FTD at the start of the week, with an even more conclusive feel. The indices rose between 2.5% and 5.5% on the day on well above average volume. This touches on the key to a sustainable post-FTD rally, which will be felt in the days and weeks to come. This can be seen in the market Datagraphs™ below*.
Figure 1: Daily chart of the S&P 500
Figure 2: Nasdaq composite daily chart
Figure 3: Russell 2000 daily chart
It is essential to have strong leadership participation following an FTD. Certainly, this has been true this month with the strong performance of these industry groups (noting representative ETFs): Software (IGV), Cybersecurity (HACK), Semiconductors (SOXX), Infrastructure (PAVE), Housing/ Related (XHB), and Aerospace/Defense (PPA). Additionally, smaller groups like steel, clothing, education and electrical are firmly in the leader category. These are illustrated in the graphics below:
Figure 4: Main group graphs
Other groups that are worse off, but have improved significantly recently, include ETFs that invest in hyper-growth stocks (ARKK
ARKK
I PAY
I BUY
KRE
2) Market Breadth and Breakouts
The second condition for this rally to sustain is a positive technical signal that the stock market’s breadth has improved significantly. This is shown on the Datagraph below which measures the percentage of NYSE stocks trading above their 30-week moving average. This measure had fallen to 18% during the correction but has now risen to more than 42%.
Figure 5: % of stocks above 30-WMA on NYSE weekly chart
Likewise, stocks breaking out of a consolidation period or base also rose according to our proprietary Breakout metric. After four months of below-average breakout totals, the week ended November 17, 2023 saw breakout totals increase again. Historically, new bull markets are accompanied by a sharp increase in breakouts.
Figure 6: Weekly distribution of US stocks
By sector, here are the proportions of recent surges. Technology, retail, capital goods and consumer discretionary are outsized, while healthcare and energy are the least represented.
Figure 7: Recent developments by sector
As mentioned earlier, corporate profits and US interest rates are two of the drivers of a possible market turnaround. The 3Q23 corporate earnings reporting season saw a normal percentage of higher earnings, although post-earnings positive price action was much stronger than last quarter. We are encouraged to see the rally take shape throughout this earnings season.
Signals from interest rates are also constructive. It seems likely that US 10-year yields have peaked. We may be entering the sweet spot in the interest rate cycle, where the Fed takes a pause but doesn’t necessarily cut rates.
Figure 8: Weekly chart of US 10-year bonds
A final positive indicator is that global markets participated in the November bullish surge:
- Sixteen of the 24 developed markets we track at O’Neil have had FTDs in the past two weeks. These include key markets like Japan, France, Germany, Spain, Hong Kong and Canada.
- Seven of the 25 emerging markets we track have had FTDs in the past three weeks. These include Brazil, Mexico, Korea and South Africa. Markets in Taiwan and India have strengthened but are yet to record an FTD, while China remains the main weak spot, barely off October lows.
Global leaders that can be invested via USD ETFs include Japan (EWJ
EWJ
GTE
EWP
EWI
INDIA
EWT
EPOL
EWZ
Figure 9: Major International Markets – Weekly Charts (USD ETF)
In conclusion, we won’t know until we can look back if this recent bullish move marks the start of a new trend. At this point, we would cautiously add capital to the stock market and remain alert for signs of progress at the overall market level, as well as at the industry group and individual stock level. We also want to be aware of a possible failure of the FTD of November 2, 2023. This would manifest as a decline in the FTD low (4,268), which is also exactly the 200-DMA at present. If this occurs, we strongly recommend reducing positions and the overall amount of capital committed to US equities.
*Note: All data in charts and tables in this article are as of November 17, 2023.