Stock Market Poised for Year-End Rally, According to Ned Davis Research
In late October, the stock market typically hits its bottom, setting the stage for a potential year-end rally, says Ned Davis Research. The renowned financial research company, known for its in-depth analysis of market patterns, suggests that the stock market is about to exit its weakest period of the year, based on seasonality data.
Ned Davis Research highlights the stock market’s seasonality pattern towards the end of the year, shedding light on potential market movements. The data, spanning more than 120 years of market history from 1900 to 2022, reveals that the stock market tends to bottom out towards the end of October before experiencing a strong rally towards the year-end.
This year, the pattern seems to be playing out once again. The median decline from the stock market’s typical high in July/September to the end of October is approximately 8%. Similarly, the Dow Jones Industrial Average has declined by around 8% since its late July peak, aligning with the historical seasonal pattern.
“As we approach the last week of October, the stock market transitions from its longest period of seasonal weakness to the most bullish two-month window,” states Ned Davis Research in a recent note.
While a year-end rally seems promising, Ned Davis Research suggests that certain conditions need to be met for it to materialize. The research firm emphasizes the importance of increased pessimism among investors and further oversold readings in the stock market. Factors such as higher interest rates and poor market breadth, which measures the participation of individual stocks in a rally, may hinder the chances of a year-end stock market surge.
“In an era of higher rates, breadth thrusts may be more challenging, but a few signals would confirm that a year-end rally is underway,” explains Ned Davis Research.
The breadth thrust indicator, utilized by NDR to gauge market momentum, plays a crucial role in determining the potential for a rally. This indicator identifies a “thrust” when a significant percentage of stocks rally together, specifically when 90% of stocks climb above the 10-day moving average.
Overall, the stock market’s historical seasonality pattern, coupled with the current alignment of declines and market lows, points towards the possibility of a year-end rally. As investors eagerly await further market developments, the research and insights from Ned Davis Research provide invaluable guidance in navigating the stock market’s intricate movements.
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