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Bear Market Rally or Bull Market Resumption? (5 Clues)
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In response to a more (perceived) “Dovish” Fed, stronger-than-anticipated earnings results, and no further geopolitical escalations, bulls have regained their mojo thus far in November. However, the big question on investors’ minds is, “Is the current rally a bear market rally, or is this a resumption of secular bull market that kicked off in late 2022?” Below are five clues that will help investors decipher whether the bullish price action is temporary or likely to be sustained:
Will Earnings Winners Hold Gaps?
Savvy investors understand that often, you can learn more by observing pullbacks than advances. Contained selling after a substantial price advance proves that investors are not in a rush to sell shares, and new buyers are enough to absorb profit-takers. One of the best ways to identify whether this most recent rally is real is to observe how winning stocks act after earnings gaps. That’s because the longer a stock goes without filling a gap, the less likely it is to fill the gap at all.
Post-earnings drift refers to the tendency of a stock to continue moving in the same direction as the initial price movement following an earnings announcement. When a company reports better-than-expected earnings results, the stock price often experiences an initial jump (gap). The post-earnings drift occurs when the stock moves upwards in the weeks following the gap. Monitor recent earnings winners like Pinterest ((PINS - Free Report) ),Netflix ((NFLX - Free Report) ), Roku ((ROKU - Free Report) ), and Arista Networks ((ANET - Free Report) ). If these stocks can hold their gaps in the coming days, momentum will likely kick in. Below is an example of Nvidia’s ((NVDA - Free Report) ) post-earnings drift in 2016:
Image Source: TradingView
Continued Stabilization in Small Caps and Banks
Stocks within the Russell 2000 Index ETF ((IWM - Free Report) ) stocks and Regional Banking ETF ((KRE - Free Report) ) have been weighing down equity markets because many were ill-prepared for the magnitude of interest rate hikes in 2023. Strength in non-tech areas if the market will help the general market carve a bottom. Last Thursday, we got some evidence – all 9 S&P sectors gained ground on Thursday. In a recent tweet, SentimenTraders’ Jason Goephert revealed that the Russell 2000 closed at a 52-week low, then surged to its best 4-day rally in at least 3 months for the 24th time. A year later, the small-cap index was higher 100% of the time, with a median return of 25.6%.
Image Source: SentimenTrader
Bullish Earnings Outlooks
Any investor who has been around long enough understands that Wall Street is a discounting device. In other words, the price of equities today reflects forward expectations. That’s good news for investors. In a recent earnings deep dive, my colleague Sheraz Mian pointed out, “Q3 earnings growth is on track to turn positive, which follows three back-to-back quarters of declines.” He continued, “The growth pace is expected to improve steadily in the coming quarters.”
Image Source: Zacks Investment Research
AI Investment Growth
Disruptive technologies and investment in those technologies drive bull markets.Tech giants likeAlphabet ((GOOGL - Free Report) ), Microsoft ((MSFT - Free Report) ) and Amazon ((AMZN - Free Report) ) are putting investment dollars to work in the AI space at a faster pace. The billions invested in AI will likely trickle down to other tech stocks to help propel the bull market forward.
Image Source: FT Research
High Time Frame Rotations
Amateur technical analysts conflate technical with being short-term in nature. However, the best technical signals come from higher time frames, such as the monthly chart. Currently, leading stocks like Advanced Micro Devices ((AMD - Free Report) ) are triggering long-term technical signals by breaking out of monthly bull flags and clearing last month’s highs.
Image Source: TradingView
Bottom Line
The recent market rally, prompted by a more Dovish Federal Reserve and strong earnings, has left investors questioning whether it’s a bear market rally or a resumption of the bull market that began in late 2022. The clues in this article suggest the latter.
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Bear Market Rally or Bull Market Resumption? (5 Clues)
In response to a more (perceived) “Dovish” Fed, stronger-than-anticipated earnings results, and no further geopolitical escalations, bulls have regained their mojo thus far in November. However, the big question on investors’ minds is, “Is the current rally a bear market rally, or is this a resumption of secular bull market that kicked off in late 2022?” Below are five clues that will help investors decipher whether the bullish price action is temporary or likely to be sustained:
Will Earnings Winners Hold Gaps?
Savvy investors understand that often, you can learn more by observing pullbacks than advances. Contained selling after a substantial price advance proves that investors are not in a rush to sell shares, and new buyers are enough to absorb profit-takers. One of the best ways to identify whether this most recent rally is real is to observe how winning stocks act after earnings gaps. That’s because the longer a stock goes without filling a gap, the less likely it is to fill the gap at all.
Post-earnings drift refers to the tendency of a stock to continue moving in the same direction as the initial price movement following an earnings announcement. When a company reports better-than-expected earnings results, the stock price often experiences an initial jump (gap). The post-earnings drift occurs when the stock moves upwards in the weeks following the gap. Monitor recent earnings winners like Pinterest ((PINS - Free Report) ), Netflix ((NFLX - Free Report) ), Roku ((ROKU - Free Report) ), and Arista Networks ((ANET - Free Report) ). If these stocks can hold their gaps in the coming days, momentum will likely kick in. Below is an example of Nvidia’s ((NVDA - Free Report) ) post-earnings drift in 2016:
Image Source: TradingView
Continued Stabilization in Small Caps and Banks
Stocks within the Russell 2000 Index ETF ((IWM - Free Report) ) stocks and Regional Banking ETF ((KRE - Free Report) ) have been weighing down equity markets because many were ill-prepared for the magnitude of interest rate hikes in 2023. Strength in non-tech areas if the market will help the general market carve a bottom. Last Thursday, we got some evidence – all 9 S&P sectors gained ground on Thursday. In a recent tweet, SentimenTraders’ Jason Goephert revealed that the Russell 2000 closed at a 52-week low, then surged to its best 4-day rally in at least 3 months for the 24th time. A year later, the small-cap index was higher 100% of the time, with a median return of 25.6%.
Image Source: SentimenTrader
Bullish Earnings Outlooks
Any investor who has been around long enough understands that Wall Street is a discounting device. In other words, the price of equities today reflects forward expectations. That’s good news for investors. In a recent earnings deep dive, my colleague Sheraz Mian pointed out, “Q3 earnings growth is on track to turn positive, which follows three back-to-back quarters of declines.” He continued, “The growth pace is expected to improve steadily in the coming quarters.”
Image Source: Zacks Investment Research
AI Investment Growth
Disruptive technologies and investment in those technologies drive bull markets.Tech giants likeAlphabet ((GOOGL - Free Report) ), Microsoft ((MSFT - Free Report) ) and Amazon ((AMZN - Free Report) ) are putting investment dollars to work in the AI space at a faster pace. The billions invested in AI will likely trickle down to other tech stocks to help propel the bull market forward.
Image Source: FT Research
High Time Frame Rotations
Amateur technical analysts conflate technical with being short-term in nature. However, the best technical signals come from higher time frames, such as the monthly chart. Currently, leading stocks like Advanced Micro Devices ((AMD - Free Report) ) are triggering long-term technical signals by breaking out of monthly bull flags and clearing last month’s highs.
Image Source: TradingView
Bottom Line
The recent market rally, prompted by a more Dovish Federal Reserve and strong earnings, has left investors questioning whether it’s a bear market rally or a resumption of the bull market that began in late 2022. The clues in this article suggest the latter.