We are mid-way through what is traditionally the bear market-killing month of October.
Also, presidential cycle factors are with the market. According to Stock Trader’s Almanac, Q4 of the 3rd year in the Presidential cycle has shown consistently positive results, particularly with an incumbent president running from either party. Further, Q1 & Q2 of an election year typically provide even more exciting returns.
Earlier this year, I wrote about how stocks trade in the period between earnings seasons. Yes, geopolitical events are very important in a macro sense but as growth stock managers, earnings are most important. We view the early reports from banks and financials not having the market moving impact of industrials, technology and consumer sectors. Tesla and Netflix report this week; we view them as a more reliable bellwether on earnings trends. Analysts are becoming less pessimistic. They are predicting the first year-over-year growth since Q3 of 2022. We did experience an earnings recession that investors feared. We did not experience the economic recession that many predicted.
The market regaining footing is a process that can have fits and starts. On a technical basis, we like to see short-term indicators, such as the percentage of stocks above their 50-day moving average or the HILO index, reverse up from oversold conditions.
After such a bounce, sometimes these short-term gauges do reverse back down, giving the sense of a false rally. If the initial reversals have come from a low enough extreme, which is what has happened recently, any pullback will actually be the false move. What happens next is “backing and filling” that gives us even more confidence that long-term indicators will follow suit, confirming the start of a lasting rally.
Looking at the 2022 October bottom is a classic example of this. Both the Stocks Above their 50-day Moving Average and the HILO index reversed down a few times before going into Bull Confirmed status. In both cases this did not occur till January of this year. This could be chalked up the overall carnage that took place during 2022.
This year, the market has been better performing, thus our favored Bull Confirmed status may arrive sooner.
Despite a recent article from the always interesting Mark Hulbert suggesting investors were already becoming too bullish, market sentiment to us appears mixed. The volatility index remains in moderate territory, not yet suggesting either a top or bottom, while put/call ratios remain elevated – suggesting a worried investing public, which is bullish.
To us, it feels like investors continue to approach the recent bounce with skepticism, which further supports our constructive view on stocks. One could argue that lingering anxiety in the bond market explains ongoing worry but by early December these seasonal trends should be widely recognized, goosed by strong earnings that have transpired yet again.
Hard as it may feel with all that’s happening around us, a bullish posture remains the right side of the market at present – precisely in line with historical seasonality.