Downside momentum usually peaks at the end of a decline, as prices cascade into a primary low. On the upside, though, momentum peaks at the beginning of an advance, then gradually dissipates as the advance goes on, and the more powerful the momentum at the move’s beginning, the stronger the overall move; REALLY strong momentum is found only at the beginning of a REALLY strong move: a new bull market or a new intermediate upleg within a bull market. We coined the term “breakaway momentum” in the 1970’s to describe this REALLY powerful upside momentum. The following is a review of what it is and how it is typically generated.

Breakaway momentum (some people call it a “breadth thrust”) occurs when ten-day total advances on the NYSE are greater than 1.97 times ten-day total NYSE declines. It is a relatively uncommon phenomenon; the table at the end of this report shows the 25 times it has occurred since World War II (an average of once every 3 1/2 years). Cyclical bull markets, though, are traditionally heralded by breakaway momentum, so we are hopeful that it will be generated this time around, too.

How is breakaway momentum typically achieved? It’s not easy. Usually, we need three things to happen. First, we need a VERY strong advance at the outset of the ten-day period. Typically, this requires an advance-decline ratio in the area of 2800-500 on the first day, 2500-700 on Day Two, and 2050-1050 on Days Three and Four. This creates a cumulative ratio of 2.69-1, which is well above the 1.97 threshold. The very strong advances on the first two days followed by still-positive breadth on the next two are a formidable achievement, but the next one is even tougher. Markets never go straight up, and the real trick in achieving breakaway momentum is to keep declines limited during the inevitable corrections that occur in any ten-day period (it takes two advances to offset every decline, which is why “good” breadth days of 2-1, or even 3-1, won’t cut it as far as achieving breakaway momentum is concerned). In order to keep declines limited during corrections, the corrections must be minimal; often, this occurs when intraday declines abort before the close, and a big breadth deficit turns into just a narrow one by day’s end. Breadth during the “correction days” (Days 5-6), then, should be no worse than 1400-1700; although this pushes the cumulative ratio down to 1.84, this is a far from insurmountable deficit. The final element needed to get breakaway momentum is a second strong advance during Days Seven through Ten; not quite as strong as the initial advance, but not too far behind it, either. If, for example, the market generates breadth during Days Seven through Ten of 2500-700, 2300-800, 2100-1000 and 1900-1200, the ten-day breadth totals are 21000 and 10400. This generates a ten-day breadth ratio of 2.02 – breakaway momentum!

The real trick in generating breakaway momentum? It’s not a lot of advances; it’s a lack of declines. If the market stages a strong two-day advance, for example, it MUST maintain very positive breadth days for a couple of days afterwards (Days Three-Four and Nine-Ten) to keep the ten-day declines to a minimum. Also, declines MUST be kept to a minimum during the “normal” correction in the middle of the ten-day period; declines can exceed advances during those two days, but not by much or it will be impossible for the market to generate the two advances needed to offset every decline.

TABLE I – BREAKAWAY MOMENTUM SINCE 1945

January 2019 Addendum

The ten-day ratio of advances to declines is used to define Breakaway Momentum. In 2016, however, Mark Ungewitter noted that the 20-day ratio hit an unusually-high 1.80 on March 11 even though the ten-day ratio never exceeded its 1.97 threshold. This was the first time the 20-day ratio had exceeded 1.72 without an accompanying 10-day reading above 1.97.

Given subsequent market action, we now know the 20-day 1.72-plus reading was a “good” signal even though it wasn’t confirmed by the ten-day ratio until July 12th. Accordingly, I have added it to the table – but with an asterisk, both to indicate that it is the 20-day ratio and to differentiate it from the 12 other post-1973 signals which were all generated and noted in real time.

So: We now know that the stock market generates breakaway momentum when ten-day total advances on the NYSE are greater than 1.97 times ten-day total NYSE declines OR 20-day total advances on the NYSE are greater than 1.72 times 20-day total NYSE declines. (Just in case the market decides to generate another 20-day signal without an accompanying ten-day signal.)

Post-BAM Performance

Post-BAM declines/corrections tend to be surprisingly brief and shallow given the amplitude of the BAM-genersting advance. (When the train leaves the station it doesn’t back up to let late-comers get aboard.)

Via and courtesy of @twillo1:

And via and courtesy of Mark Ungewitter:

 – Walter Deemer

It’s a new year, so there’s no better time to take a step back and think about what will drive markets in the months ahead.

The Components of Inflation

At his November 30, 2022 speech, Federal Reserve Chair Jerome Powell described the 3 primary components of inflation – Core Goods, Housing Services, and Core Services less housing. Core goods drove the first wave of this inflationary cycle, as surging demand for tangible products during the pandemic came face-to-face with sagging production and supply chain disruptions. The next wave was led by a spike in the cost of housing.

Core goods inflation peaked in early 2022, and housing will likely peak around the middle of this year (see Figure 3 below). The Fed will look past what it sees as ‘transitory’ declines in core goods and housing inflation, and instead focus on the price of core services. These charts are from his presentation:

The Tightening Cycle

Powell and Co. claim they’ll do whatever it takes to cool inflation, even if it pushes the US economy into recession. It’ll take higher interest rates for longer, according to their models.

Wall Street doesn’t seem to believe them. While the median dot from the FOMC’s December Summary of Economic Projections implies a year-end 2023 rate of more than 5%, Fed Funds Futures are pricing in a rate not much higher than where we are now.

Labor Market Showing Signs of Weakness

The primary goal of the Fed’s interest rate hikes is to put a stop to excess inflation. To do that, they need to loosen an extremely tight labor market and dampen demand.

If you look at the unemployment rate alone, you won’t see much change, but beneath the surface, tightening monetary policy is having an effect. Weekly continuing jobless claims, while still near the lowest levels of the last 50 years, have jumped by 400,000 in the last 6 months. The 8 other times claims have risen this quickly, a recession has followed.

Credit Spreads

If the US economy is headed for recession, credit spreads aren’t showing it. A common feature of slowdowns in economic activity is increased default rates by both consumers and businesses. As a result, lending rates to those borrowers rise faster than the risk-free rate paid by the US government.

Credit spreads increased in the early part of 2022, but they’ve since stabilized. If negative GDP growth is ahead, this chart should give us advance warning.

Tech Stocks’ Big Top

Growth stocks were in control for more than a decade after the financial crisis. Being a ‘Value’ investor was synonymous with underperforming. That changed in September 2020, when Information Technology ran into the relative highs it set at the peak of the internet bubble.

Lots of people will argue that technical analysis is a farce. Price moves are random, and historical moves have no bearing on the future. Even more folks will balk at the importance of prices from more than 20 years ago – let alone the ratio of two price indexes.

Does the chart below look random? Do you really think it’s just coincidence that after a decade-long bull market, Tech just happened to peak at exactly the 2000 highs – the height of the biggest Tech bull market of our lifetimes?

In any case, Tech won’t be a secular outperformer again until it absorbs all this overhead supply. In fact, the latest weakness makes it more likely that the sector will continue to underperform in 2023.

Growth vs. Value

Much like the ratio of Tech to the S&P 500, growth stocks have underperformed their value counterparts for much of the last 2 years. There hasn’t been much reason to like the prospects of growth companies, especially in the face of rising interest rates around the world.

That seems to be the consensus opinion, though, and it often pays to play devil’s advocate. Here’s one reason to think 2023 could be different: the Russell 1000 Growth index is nearing a potential level of support relative to the Russell 1000 Value index. The ratio is currently at the 38.2% Fibonacci retracement from the entire 15-year rally.

Crypto

Cryptocurrencies had a tough year in 2022, and that weakness looks set to continue.

Bitcoin is stuck in an indisputable downtrend, having broken the summer lows in November following the FTX meltdown. Former support around 19000 is now overhead supply, and the next area to watch on the downside is 13000. A rally back above 20000 could quickly change the narrative.

Precious Metals

It’s been a while since precious metals were cool. Gold and silver both outperformed handily during the onset of the pandemic in early 2020, but then they lagged in spectacular fashion over most of the next 18 months.

2022 was a year of consolidation for the two metals relative to equity markets. 2023 might be the year they become leaders.