Pedal to the Metal: The Outlook for '24 (Jan. 11, 2024)
Written January 11, 2024
“Beware of the purveyors of pessimism-we’re in a bull market.” -Larry Williams.
The NASDAQ is in a “power trend,” a robust advance, potentially a “life changer.” These are bold assertions, but both claims have historical precedents. Mark Twain said, “The market doesn’t repeat but it rhymes.” The most recent precedent for current favorable conditions is Apr. 6, ’20- Nov. 21, ‘21, a 19-month span where the NASDAQ advanced 104.87%.?
The current rally was confirmed by a follow-through day (FTD) on Nov. 1, aka “October 32nd.” Historically, October has had the most follow-throughs of any month. Two days later the S&P 500 followed through, confirming the rally had staying power. Rallies can fail, however - the September 1st FTD failed on the 20th, and ?Oct. 6 was a FTD but eventually failed the on 23rd. Failures occur when the averages make little net progress after the follow-through and usually quickly.? The opposite is happening now.
The three-legs-down since July 19 had forced sellers out, but buyers came back with a vengeance on Nov. 1st. The mood among investors was awful in October. After two years of declines, fear of recession & further rate increases, markets were hesitant. Many view October as a month when bad things happen in the market. However, Larry Williams’ research indicates that it’s the best month to buy. The seasonal pattern that begins in November through April is the strongest of all the seasons.
Mike Webster at IBD identifies three conditions necessary to confirm a “power trend.”? Each is necessary but none alone is sufficient.
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Further evidence of market strength includes gaps-up (Nov. 1,2,3) additional follow-through days, accumulation, and significant outperformance by leading stocks many of which are part of the DSS portfolio, like Broadcom, Adobe, Axon, CrowdStrike, Hub Spot, Service Now & Palo Alto Networks. Collectively these signs point to the probability of a continuing, robust uptrend. During previous periods like this, the default has been the gas pedal.
How long can the uptrend last? A comparable time was Apr. 6 ‘20 to Nov. 22, ‘21. After a Sept. ’20 correction, the NASDAQ resumed its uptrend & ended ‘20 up 63%. The NASDAQ continued to rise, reaching an all-time high (16,212) or +104.86% in 19 months.?
“Power Trends,” like ‘20-’21, and the present fall into two categories- the “money-maker” & the “life-changer.” Eric Krull’s research on follow-throughs proved that the potential strength of an advance has its provenance in its nascent stages - the first 20 sessions after a FTD. If the NASDAQ advances 5% or more in the first 20 trading days, it’s a period when an investor should be able to profit, a so-called “money-maker.” The second type of advance- a “life-changer,” is when the gain is 8% or more in the first 20 days. Under those circumstances, the returns are likely to be much greater allowing an investor to experience meaningful returns. As of Nov. 10, 8 sessions after the follow-through, the NASDAQ was up 5%.? By the 20th session, Nov. 30, the NASDAQ had advanced 9%.?
Rate increases, inflation worries, and recession fears have compressed valuations, especially in young, innovative growth companies. Ironically, the fundamentals-returns-on-equity, sales & earnings growth plus margins-of the best companies haven’t declined as much as their valuations, providing significant opportunities. Extreme pessimism always precedes a market turnaround. Disruptive innovation isn’t priced correctly by traditional investment strategies because investors underestimate how big the opportunity will be. Think of how things were done before Microsoft introduced Excel, Word, Office, or PowerPoint. Now envision these platforms powered by artificial intelligence and the productivity gains that will be realized.?
The Disruptive Stock Strategy Team:?
John Preston [email protected]?Liam Hibbits [email protected]