February Outlook: Bullish January Indicator Trifecta On Track, Best Case Scenario In Play
By: Jeffrey A. Hirsch & Christopher Mistal
January 26, 2023
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Markets continue to climb the “wall of worry” as the indexes encroach on resistance and new recovery highs. The battle to break the long downtrend line from the January 2022 highs rages on. DJIA was the first to breakthrough last November. Tested it during the early December pullback. The rebound put DJIA firmly above its 200-day moving average and, in the process, generated a golden cross with its 50 DMA crossing above the 200 DMA.
Russell 2000 was next, finally clearing the downtrend earlier this month along with its 50 and 200 DMAs as the January Effect of small caps outperforming large caps in January materialized. On pages 112 and 114 of the 2023 Stock Trader’s Almanac we detail how this January Effect really begins in mid-December and often runs through March. Tech heavy NASDAQ and the S&P 500 are just now poking through their downtrend lines with S&P surpassing its 200 DMA. NASDAQ is still below its 200 DMA but it’s on a tear this year, leading the averages with a 10% gain for the year so far. 
Some of the sentiment readings we track like Investors Intelligence US Advisors’ Sentiment Report have shown an uptick in bullish sentiment with more bulls than bears since mid-November. But there are still countless retail investors, traders, Wall Street analysts and pundits that remain adamant bears. We continue to receive bearish retorts to our bullish outlook and commentary. 
Most expect a recession this year, inflation not to ease, earnings to continue declining and the Fed to over reach on rates. We contend that there was an “official” recession last year with two consecutive quarters of negative GDP in Q1 and Q2. Earnings are forecasted to bottom in 2023 Q2 and the Fed is nearing the end of rate increases. 
In the words of our late founder Yale Hirsch, the market is barometer, not a thermometer. It is a forecasting mechanism that looks past the valley of economic despair to the bright future 6-8, even 12 months down the road. Our contrary antennae continue to purr, and we are considering ordering a batch of DOW 38820 T-Shirts. 
So now we are upping the ante and tilting our 2023 forecast towards our Best Case Scenario for above average pre-election-year gains of 15-20%, perhaps more, especially for NASDAQ as the tech wreck appears to be over with several big tech names cleaning house and bouncing back. 
It doesn’t look like there is any end is sight for the Ukraine/Russia conflict, but China has loosened its Covid-19 protocols, supply chains are recovering, inflation continues to retreat, the Fed is nearing the end of tightening, unemployment remains low, and growth is showing signs of picking up. 
S&P is now up 5.75% year-to-date, which is ahead of all the various pre-election year scenarios in play this year in the familiar chart below. Early year market chop may bring 2023 back in line with history, but no matter how we slice it the year is off to a bullish start.
[Pre-Election Year Chart]
January Trifecta More Bullish After Bear
We invented our January Indicator Trifecta in 2013 by combining our Santa Claus Rally and January Barometer, both invented by our late-founder Yale Hirsch in 1972 published in the 1973 Almanac, with the age-old First Five Days Early Warning System.
Our analysis dictates that the bear market bottomed in October 2022. NASDAQ did have a lower closing low on December 28, 2022, but it made its intraday low on October 13 along with DJIA, S&P 500 and Russell 2000. DJIA made a closing low on September 30, S&P on October 12 and R2K back on June 16. Bottom line 2022 was a bear market year.
Our January Indicator Trifecta January is off to a great start this year with the Trifecta 2-for-2 so far. Our Santa Claus Rally (2023 STA, page 118) and the First 5 Days (2023 STA, page 16) logged S&P 500 gains earlier this month. With three days left it appears our January Barometer (2023 STA, page 18) will be positive and the Trifecta will be 3-for-3, which as you may remember is rather bullish. When there is a bear market low the prior year it’s even more bullish for the year.
Trifecta after bear table
Using the Ned Davis Research bull and bear market definitions there were thirteen years since 1949 with bear market bottoms preceding a positive January Indicator Trifecta. S&P 500 was positive in all 13 years with double-digit gains every year, up 22.1% on average. The next 11 months have also never been down, up 16.8% on average.
When you take a look at the aggregate cycle charts of these 13 year (7 for NASDAQ) in the chart below of DJIA, S&P and NASDAQ it may be hard to contain yourself. NASDAQ and the techs may have been in the doghouse in 2022, but if this Trifecta after a bear market cycle follows the average course NAS could be up over 30% in 2023.
[Trifecta after bear Chart]
The bears may be grabbing all the headlines and soundbites, but we have history and a host of data points that support our bullish outlook. History teaches us that all indexes do not bottom out at the same time when bear markets end, take 1974 for example. Market turns are not always accompanied by some Eureka moment or a blatantly obvious capitulation V-bottom. We expect the bull market we have forecasted to continue to be choppy through Q1, but it is unfolding. 
It was a tech boom during Covid-19 and 2022 was the tech recession. It is not apparent to us that tech will sink the rest of the economy into recession. Q4 GDP was solid and employment data remains robust – even with the recent big tech layoffs. Big tech is returning to more appropriate staff sizing. They had ramped up for 30-50% growth, but now it’s more like 0-10%. They are trimming the fat. 
The market continues to confirm our bullish outlook. S&P is heading towards important resistance at the December high around 4100 after that it’s the August high around 4300. We will be keeping an eye on the December Low Indicator (2023 STA, page 36) with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022. But we want to be clear we are shifting our outlook to our Best-Case Scenario for above average pre-election-year gains of at least 15-20%.
Pulse of the Market
Looking at a chart of only DJIA does not show the full picture of the strength the market has exhibited thus far in January. As of the close on January 26, DJIA was up 2.42% compared to 5.75% by S&P 500 and 9.99% for NASDAQ. DJIA’s laggard performance this year is likely due to being the least down index last year and its leading Q4 performance last year. S&P 500 and NASDAQ simply appear to be catching up. 
DJIA has slipped into a trading range after breaking out above last summer’s high. Bullishly DJIA is back above both its 50- and 200-day moving averages (1) and has been building a series of higher lows since mid-December. DJIA’s lack of momentum in either direction is confirmed by both the faster and slower moving MACD indicators (2). MACD indicators have been oscillating around the zero line since late-December.
Dow Jones Industrials & MACD Chart
As 2022 ended, DJIA recorded the first half of a Down Friday/Down Monday (DF/DM) (3) with mild declines on the last trading day and the first trading day of 2023. Bullishly DJIA quickly recovered from the DF/DM. Historically a quick recovery has staved off additional and often substantial declines sometime during the following 90 calendar days. Fewer DF/DM occurrences would be positive for 2023.
After four straight down weeks in December, NASDAQ has been up three weeks in a row to start the year (5). DJIA and S&P 500 (4) have advanced in two of the last three weeks. All three indexes are on course to finish this week positive. A five-week winning streak from NASDAQ would enhance the odds that the market is in a new bull market.
NYSE Weekly Advancers and Weekly Decliners (6) have remained consistent with the market’s overall moves. Weekly Advancers easily outnumbered Weekly Decliners during up weeks while the opposite was true in declining weeks. Bullishly, Weekly Advancers outnumbered Weekly Decliners last week even as DJIA and S&P 500 slipped slightly lower for the week. This suggests recent strength is broad based and not limited to just the big, familiar names that comprise the indexes.
Weekly New Highs (7) have also been bullishly increasing since mid-December while Weekly New Lows briskly retreated. 28 New Weekly Lows is the smallest number since late-February 2021. Here again we see indications of broad buying interest at levels consistent with past bull markets. We look for New Highs to continue to slowly expand while New Lows stay subdued.
Weekly CBOE Put/Call ratio (8) spiked to 1.37 during the final week of 2022. This is the highest number in our records going back to May 2001. Digging into the daily data that makes up the weekly value, the weekly spike was due to a daily spike on December 28. The rising popularity of zero days to expiration (0DTE) options is clearly impacting this once reasonably reliable indicator. Single-day options trades most likely reflect the sentiment on that day and only that day. 
The 90-day Treasury yield has continued to move higher in anticipation of another Fed interest rate increase on February 1 while the 30-year yield has retreated (9) considerably from its high of 4.24 in November to 3.60 last week. Not shown is the 10-year yield, which has also declined substantially. The retreat in longer-term rates is giving the housing market a modest boost. This suggests to us the odds of a soft economic landing and the continuation of the current bull market are increasing.
Click for larger graphic…
Pulse of the Market Table