Hi all,
In our last post, we spoke about our view that a new bull market had started. Since the close on January 12th, the Nasdaq 100 rose 12.4%, while the S&P 500 rose 5.3% and the Russell 2000 (small caps) was up 7.23% at their peaks, respectively.
We also attempted to stress that this does not mean there won’t be pullbacks and we don’t think that we’re headed for all-time highs in 2023. In fact, in the first three months following a breakaway momentum signal, the average decline in percentage terms is 5.6%. And while it’s always possible the market falls further and we take out the October lows, it would be unprecedented. On February 15th, the S&P 500 closed above its 200-day moving average for almost 4 straight weeks. No prior bear market in history has made a new low after making 18 consecutive daily closes above its 200-day average. None. If you’re betting on the market continuing lower from here, you’re implicitly saying “it’s different this time” (we don’t do that).
Combined with seasonal trends (see chart below courtesy of BTIG’s Jonathan Krinsky), a pause not only seems fitting after a stellar start to 2023, but also welcomed so that stocks can continue to make a base at this new price level and sow the seeds for the next advance.
Even though we are looking for a bit of a pullback into mid-March, we believe historical trends remain on our side. It’s a bit of cherry-picking the data, but a negative year for stocks, followed by a January that is up more than 5% has happened five additional times since 1950 (2023 was the sixth occurrence). In those five other time periods, at year-end the S&P 500 was higher in all five, with an average full-year return of close to 30% (see chart below courtesy of Ryan Detrick from Carson Investment Research).
Learning to get more comfortable with the ups and downs of the market is a huge step in being able to weather the storm. After a great January, and a good start to February (not so much recently), try to zoom out and look at the bigger picture.
– Adam