The Blistering Start is About to Pause

The fifth best start to a year in a century … get ready for an RSI-based pullback … Luke Lango expects monster returns in tech … Louis Navellier urges a fundamental focus

The market is off to a blazing start this year.In fact, the blistering returns make this the fifth best start to a year over the last century.Here are the data from Birinyi Associates:S&P 500: best starts to the year

(Jan. 1-Feb. 2nd, rounded off)

  • 1934    + 15%
  • 1987    + 14%
  • 1975    + 12%
  • 1976    + 12%
  • 2023    + 9%

Historically, such a jack-rabbit beginning has resulted in two things:One, full-year gains.Two, higher volatility during the year.As to “high volatility,” according to Birinyi, in eight of the 10 years where the S&P was up at least 7% by Feb. 2nd, the S&P moved minimally 10% over the remainder of the year.

We might be on the verge of one such bout of bearish volatility

Below, we look at a chart of the Nasdaq over the last year.In the lower pane, we’ve added the Relative Strength Index (RSI). This is an indicator measuring the extent to which an asset or index is overbought or oversold.Historically, when levels reach these over-stretched conditions, a reversion move in the opposite direction shortly follows.We’ve circled three such over-stretched RSI levels that have occurred in the past 12 months.Notice what the Nasdaq did the first two times the RSI hit such an elevated level.Then, pay attention to the RSI level the Nasdaq reached last week (the most extreme of the last 12 months). And note what’s happening now – namely, the RSI and the Nasdaq’s price are dropping hard.

Chart showing the drawdown in the Nasdaq following previous times when its RSI level reached overbought levels in the last 12 months

This is a short-term red light for the Nasdaq.Plus, we see this same dynamic when looking at the S&P.Its RSI recently topped out at a level that was higher than any point in the last 12 months except for last summer, before the crash that took the index down to its bear-market-low in October.The RSI of the stodgy old Dow hasn’t been nearly as high recently. This makes sense as the Dow’s max gain on the year is just 3% compared with the 9% and 17% max gains, respectively, from the S&P and Nasdaq.

Our hypergrowth expert Luke Lango sees the potential for a pullback, but he’s confident that bullishness is the other side

From Luke’s Innovation Investor Daily Notes:

Per our analysis, this is indeed the start of a big new bull market in tech stocksHowever, our metrics also indicate that tech stocks are technically overbought right now. Therefore, we are expecting a short-term pullback over the next week.We will buy this dip because it won’t be big, and it won’t last long. After this short-lived retreat, tech stocks will keep soaring for the rest of the year. We are already pacing ahead of our target to achieve 100%-plus returns across all of our portfolios in 2023. We fully intend to exceed that target. 

Part of Luke’s enthusiasm comes from a study of history.He ran an analysis that counts the number of stocks that rise 10X in a single year. He found that in a normal year two to four stocks rise 10X.But in years following a market crash, such as the one we endured last year, that number shoots higher.Here’s Luke with those details:

Following the COVID-19 crash, the number of stocks that rose 10X soared to 25 in 2020 and 17 in 2021.In the wake of the 2008 financial crisis, the number of stocks that rose 10X soared to 25 in 2009.After the dot-com crash, the number of stocks that rose 10X hit six in 200213 in 2003, and 10 in 2004.

Based on these data, Luke was already expecting 2023 to bring a similar number of elevated 10X winners.But that conviction only intensified after last week’s press conference with Federal Reserve Chairman Jerome Powell.Back to Luke’s Daily Notes:

[Last Thursday’s] rally was mostly inspired by [Wednesday’s] dovish commentary from Fed Board Chair Jerome Powell.Powell’s note that the disinflation cycle has begun almost guarantees that a Fed pause is coming very soon.The price action, fundamentals, and technicals are all very bullish. Everything looks very bullish.We’re just overbought in the short term right now and are due for a technical pullback.Embrace it. Buy the dip. It will come and go quickly.Once it’s over, the massive tech stock rally of 2023 will continue.

Legendary investor Louis Navellier also sees bullishness on the horizon thanks to Powell’s dovish undertones

In his analysis, Louis called out the “double speak” we saw from the Fed.Specifically, he cited bearish elements of it, such as the policy statement saying, “Inflation has eased somewhat but remains elevated,” as well as the need for “ongoing increases.”But on the bullish side, Louis pointed toward Powell’s press conference, in which he said, “If we do see inflation coming down much more quickly, that will play into our policy setting, of course.”Louis also highlighted Powell’s comment that it’s “certainly possible” that the Fed will keep its benchmark interest rate below 5%.Here’s Louis’ takeaway:

The Fed always does its best double speak – but the fact that they’re acknowledging that inflation is easing and that the rate hikes are getting smaller is good…Getting the Fed funds rate to 5% would mean only one more rate increase of 25 basis points. And that’s a big positive for the stock market…The bottom line is that the Fed can try to tighten all they want, but market rates are falling and inflation is cooling off. So, as far as I’m concerned, the Fed should tap the brakes soon.Remember, the markets are forward looking – and after [last week’s] action, it’s clear they see a light at the end of the tunnel.

Louis is eyeing stocks with superior earnings

Even though Powell could be shifting dovish, we still have plenty of rate-hikes from last year working their way into the economy. That will continue to weigh on corporate America’s earnings.So, it’s important that you’re investing in companies that can keep growing their bottom line despite tightening economic conditions.Here’s Louis on that note:

The fact is that the market continues to narrow as earnings momentum has slowed dramatically. The S&P 500’s earnings are expected to decline 5% for the fourth quarter and continue to slide in the first two quarters of 2023…So, it’s vital that we remain fundamentally focused and stay invested in stocks with robust earnings and sales growth, as well as positive analyst revisions and strong forward-looking guidance.

If you’d like to let Louis’ high-powered computer algorithms do the heavy-lifting of finding such fundamentally-superior stocks for you, click here to learn more about joining him in Breakthrough Stocks.

Putting everything together, here’s today’s takeaway

Watch out for a short-term pullback in stocks – it could have already started. We’re dropping out of heavily overbought conditions.According to both Luke and Louis, look for increasing bullishness as 2023 progresses, along with a dovish shift from the Fed.For outsized returns, Luke points toward top-tier tech stocks, while Louis urges a focus on stocks with quality earnings.We’ll keep you updated.Have a good evening,

Jeff Remsburg

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