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November Market Outlook

Second Zweig Breadth Trust of 2023

At the close of market on November 3rd, the stock market produced the second Zweig Breadth Thrust (ZBT) of the year: a bullish indicator that has only occurred 27 times over the last 76 years. While these types of thrusts are very rare, what makes this one even more interesting is that this is only the second time since 1962 that a Zweig Breadth Thrust has occurred twice within the same year. As the chart below will show, the two thrusts in 1962 both lead to 20% returns in the S&P 500 over the next year, and 40% returns over the next 2 years. While there is no guarantee that the S&P 500 will see the same type of returns moving forward, seeing a second Zweig Thrust in 2023 helps us maintain our conviction that the market will continue to surprise to the upside over the coming months.

Not to get too technical, a Zweig Breadth Thrust occurs when the 10-day moving average of NYSE advancing issues goes from below 0.4 to 0.615 in a 10-day period or less. Said another way, 6 out of 10 issues on the NYSE are going up for several days in a row. While these types of thrusts can put the market into a short-term overbought condition, the intermediate and longer-term expectations should be for the bulls to maintain control.

The chart below shows the forward performance of the S&P 500 after each of the Zweig Breadth Thrusts since 1947:

Looking at each of the periods above, it is easy to see how bullish market returns have been when past Zweig Breadth Thrusts have occurred. One year out from the thrust signal, the S&P 500 return has always been positive, except for the Crash of 1987, and has averaged a return of 18.75%. On a two-year basis the positive success rate falls slightly, but the average return of the S&P 500 over that period jumps up to 29.95%.

Going back to the two Zweig Thrusts that occurred in 1962, both the forward one year and two year returns for the S&P 500 were well above average. The S&P also posted a 9% gain in the third year from the double signal before losing strength in 1966, which of course was a mid-term election market year. One of the characteristics of the market return over this three-year period was a lack of volatility. Other than a 10% correction that occurred between May & June 1965, the S&P 500 consistently moved higher in the three years following the second Zweig signal in 1962.

Back at the beginning of April when we discussed the first Zweig Thrust Signal, we stated the following:

“It has been frustrating with all the bullish signals we have seen over the past few months, that the market has not been able to break out of its trading range. Our belief is that once the external factors, mainly the Federal Reserve at this time, are no longer a market concern, these bullish signals will finally begin to follow their historical patterns and market prices will be able to break out.”

Eight months later, the market remains frustrating, and the S&P 500 has continued to trade within the same range it has been in the last 3 years. But we now have more clarity on the Federal Reserve as they appear to be at the end of their rate hiking cycle. While the Fed may remain higher for longer, the threat of hyper-aggressive rate hikes are now behind the market, which should allow for volatility to drop and the overall market to broaden in an incredibly positive way.

November Historical Data Points

  • November traditional represents the beginning of the ‘best six months of the year” as part of the ‘Sell in May’ rule. Bearish seasonality usually bottoms out in late October.

  • November is historically the best month of the year for the S&P and the Dow Jones, with both the Nasdaq and Russell 2000 coming in as the second-best month.

  • The day before and the day after Thanksgiving are traditionally very bullish. Since 1950, the market has been up 75% of the time on the trading days surrounding the holiday.

The chart below is a reminder to show investors where we currently are in the S&P 500 Pre-Election Year cycle.

Understanding the Data

While we are not completely out of the woods yet, there has been a notable shift in the bond market over the last few weeks. After what seemed like a non-stop surge higher over the last in Treasury yields over the last three plus months, we have finally begun to see yields settled down, which is a welcomed relief. Remember as we said last month, it is not the fact that yields are higher, it is the rate of change that causes volatility to increase throughout the market. Although the Fed maintained the current policy stance and continued to stress “higher for longer” following the conclusion of their most recent committee meeting on Nov 1st, recent economic data continues to reinforce our belief that the Fed is finished raising rates and maybe much closer to cutting rates than they want investors to believe.


The third quarter GDP released on October 26, was one of the best quarterly GDP readings of the last 40 years, coming in at 4.9%. Outside of the post-Covid quarterly releases, you would have to travel back in time 20+ years to the Tech Bubble days to find GDP readings as strong as this part quarter. So, with such a strong reading you must wonder, why did the Fed not increase their policy at their Nov 1st meeting and why have bond yields fallen? Again, it comes down to the details of how this reading was attained.

  • Inventory accumulation accounted for more than a quarter of the GDP growth, this is one of the largest inventory numbers seen in the last few decades and more than likely pull growth from future quarters.

  • Deficit spending by the Government continues to surge, which in turn continues to keep GDP growth positive. If the Government only spent as much as it took in, third quarter GDP would have been negative by about -2.3% on a year over year basis.

  • Consumer spending continues to support the GDP numbers as well, but with wage growth slowing, college loan repayments starting again, and credit card balances exploding higher, it would be almost impossible for consumers to maintain their current spending rates.

  • Real Nonresidential Fixed Investment Growth was negative for the quarter as higher borrowing costs and inflation are finally slowing business spending. Almost all fixed investment growth seen last quarter came from government spending under the Inflation Reduction Act and Chips Act.

While we do not see GDP numbers collapsing as we move forward, the third quarter reading should only be viewed as a one-time event and not the start of a much larger growth trend in the economy. We expect GDP to remain around its more historic 2% range moving forward.

October Non-Farm Payrolls

Last month we provided a breakdown of how the Bureau of Labor Statistics (BLS) creatively announced 336,000 net new jobs created in the month of September. This month the BLS used another one of their magic tricks to show there were 150,000 net new jobs created in October.

Deep down, in the monthly jobs data that is released by the BLS on the first Friday of each month, there is an interesting line item called the “Total Non-Farm Net Birth-Death Forecast”. This forecast is a two-part model the BLS uses to estimate the number of new jobs created or lost due to the lag time in their traditional monthly employment surveys. Said another way, the BLS uses past data and mathematical formulas to make assumptions on the net number of jobs gained or lost each month that are not included in their survey data. While this forecast has been used for more than two decades now, it is always interesting to compare not only the current month forecast with the BLS monthly non-farm payrolls, but also the monthly revisions of previous month’s numbers.

For the month of October, the BLS reported there was a net gain of 150,000 new jobs. Although down from September’s payroll number, 150K new jobs was about in line with what Wall Street was expecting. But for the month of October, the BLS also reported there was an increase of 412,000 net new jobs created from the total non-farm birth-death forecast. Again, these jobs are an assumption of their model, not actual data that has been confirmed. So, it is simple to subtract away the assumed net new jobs forecasted by their model (412K) from the actual non-farm number (150K) for the month and see that the actual household survey saw a net loss of -262,000 jobs for the month of October.

In past years, the Birth-Death forecast has not been as much of a concern for the monthly jobs data. But considering the abnormally larger monthly negative revisions we have seen in most months the past year; it raises skepticism as to what the unemployment picture really looks like. For example, this year we have seen the initial monthly non-farm payroll number for the months of February, March, and August, revised lower by more than 25%. Even the ‘great’ jobs number for September, has already been revised low by more than 11% (39,000 jobs), a month after its release.

In our opinion, the details of the third quarter GDP release and the October jobs numbers are starting to show some cracks throughout the economy. Currently these data points are not major issues, but bare watching, closely. In the meantime, the weakness in this data has supplied somewhat of a ‘goldilocks’ market as the Fed has stopped raising rates and bond yields have finally relaxed.

November Market Outlook

Looking back on the last two years, it is amazing how well the equity markets have been able to hold up. Although the S&P 500 remains about 9% below its January 2022 highs, the list of worries that the market has had to overcome has been significant:

1. The most aggressive Fed policy in history with 11 rate hikes in a 15-month period, including an unprecedented four consecutive rate hikes of 0.75 bps.

2. The Fed started their Quantitative Tightening program in June 2022 and over the last 17 months they have run off more than $1.6 trillion in securities from their balance sheet. At a rate of $95 billion per month, this run off represents the effect of roughly another .50 bps Fed hike each month.

3. Inflation has risen at its fastest pace in more than 40 years and remains elevated above the Fed’s desired levels.

4. In March of 2022 we saw two of the four largest bankruptcies in US history as both Silicon Valley Bank and Signature Bank were taken over by the FDIC.

5. War has been raging between Ukraine and Russia for 19 months.

6. War has broken out between Israel and Hamas, which potentially could expand into a much larger conflict.

7. 2023 should be another down year of the 10 Year US Treasury Bond, this will be the third year in a row that the 10 Year has dropped in price, something that has never happened before in the long history of our markets.

8. The United States continues to travel down the path of a deeply divided country.

While we are still about 9% off all-time highs in the market, the fact that the indices have been able to withstand so many significant issues should provide some confidence to investors when looking ahead.

Seasonality says that investors should expect a strong end to 2023 for the markets and we agree. With bond yields coming off their highs, the price of oil moderating, and the growing belief that the Fed has finished raising rates, should provide enough fuel to close out the year on a strong note. We are also expecting this strength to continue into the first couple of months of 2024, as the month of November kicks off the best six months of the market cycle.


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