Market Outlook Update: Streaks, Small Caps & Seasonality
By: Jeffrey A. Hirsch
November 09, 2023
Everyone is talking about market seasonality these days. Thank you. But let’s not take our eyes off the ball. Our updated seasonal pattern charts below of NASDAQ and S&P 500 show that stocks are still prone to choppy trading through mid-December, especially in pre-election years. And as we have been reminding lately one of the main indications that could derail our bullish outlook is if stocks do not rally during this bullish season and the market does not hit our January Indicator Trifecta (2024 Stock Trader’s Almanac, page 20). To wit:
If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.” — Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)
Technically the market is looking stronger. As we mentioned in the members only webinar, S&P 500 bounced off important support just above 4100 in late October near the February 24, 2022, intraday low on the day Russia invaded Ukraine. After registering weak numbers during the correction, market internals flipped positive during the recent rally and 8-day winning streak, triggering a rare Zweig Breadth Thrust Indicator when widespread buying follows widespread selling.
We still have our concerns. After Fed Chair Powell’s dovish post-FOMC meeting presser, today in remarks to an IMF group in Washington, D.C. he said he’s “not confident” the Fed has done enough to quell inflation. The 10-year bond rate ticked up a little. The dollar has been a little stronger. There’s also the U.S. Federal Government shutdown showdown hanging over the market and of course heightened geopolitical turmoil. But the economy is still showing clear signs of resilience and the seasonal and 4-year cycle patterns are still tracking quite well. So, for now we remain bullish and long U.S. equities and we provide new carefully selected stock ideas today.
[NASDAQ Seasonal Chart]
[S&P Seasonal Chart]
Still Bullish Even After S&P 500 Daily Winning Streak Ends
[Streaks Table]
The S&P 500’s 8-day winning streak ended today, but fear not, S&P is still bullish even after these streaks end. Including the current S&P 500 daily winning streak there have been 233 six-day (or longer) winning streaks by S&P 500 since 1950. Longer streaks are infrequent. Although S&P 500 has gone as long as 14 days without a decline (March 26 to April 15, 1971), it has done so just once in nearly 74 years. 
The current 8-day streak added 6.4% to the S&P 500 since it began on October 30. This is better than the average performance of the past 34 times that S&P 500 has been up eight days in-a-row, but well below the 11.9% S&P climbed in an eight-trading-day streak from March 12 to March 21, 2003.
Now that this streak has ended, all is not lost. As you can see in the following chart of the 30 trading days before and 60 trading days after the past 7-, 8-, and 9-day daily winning streaks ended, S&P 500 continued to move higher on average over the next 60 trading days.
[Streak 30 days before/60 days after Chart]
Open Season for Small Caps 
[Small Cap Season Chart]
Small caps have been struggling for two years now, hurt by non-transitory high inflation, the most aggressive rate-hiking regime we’ve seen since the 1980s, geopolitical turmoil with war on two fronts, fallout from pandemic and post-pandemic economic and labor woes. And the Russell 2000 small cap index recently hit a new multi-year low at the end of October. 
But, seasonally speaking, small caps are set up for their annual yearend rally into Q1, often referred to as the “January Effect,” where small caps outperform large caps in January. As we point out on pages 112 and 114 of the Stock Trader’s Almanac, most of the “January Effect’s” small cap outperformance takes place in the last half of December when tax-loss selling abates. Our annual November stock basket in the accompanying article of this week’s issue contains some brand-new, undervalued, off-Wall-Street’s-radar small cap picks.
As you can see in the accompanying chart the R2K has been tracking the pattern quite well since July and it looks like the small fry are coming out of hibernation just in time for small cap stock hunting season. Small cap stocks are facing several obstacles mentioned above, but they rallied strongly off the October 27 low with the rest of the market. R2K has given back some ground this week and our iShares Russell 2000 (IWM) position is still the worst performer of the Tactical Seasonal Switching Portfolio.
But as illustrated in the chart, small caps exhibit some chop from late-October through mid-December. Our small cap stock picks have historically done well as long as you honor the buy limits and stop losses. Last pre-election year in 2019 R2K had a nice rally from October to January before it was crushed by the pandemic.