trying year continues to drag on for investors with the djia down over 15 the sp 500 down over 20 and the nasdaq composite down over 30 by any measure this has been a brutal bear market for us stocks on top of a volatile and contentious period for equities us politics have also been rancorous as we roll into what should be a tightlycontested election season o’neil global advisors oga with assistance from our sister company william o’neil co won examined the market history with regards to midterm elections so far this year the relationship and direction of past patterns have held up to an exaggerated degree with each quarter’s performance coming in far weaker than the longterm averages using history as a guide things are progressing as expected for the second year of a firstterm president normally after a weak nine months through september the fourth quarter in the second year of a president’s first term has had positive performance returns as shown in the bar chart below as of october 17 the us stock indices have risen 34 to start the current quarter looking further out after a hard second year the third year of presidencies are historically very strong on average in fact they are usually the best of the fouryear cycle as the chart below demonstrates this is especially true with the nasdaq composite which tends to favor growth stocks normally these thirdyear gains are concentrated in the first half of the year and build upon gains for the second year’s q4 if this pattern plays out this time the market could begin a move higher soon by the second half of a president’s third year these gains slow below is the overall performance of the third year of presidential terms going back 120 years for the djia oga uses this index for much of our work because the data go back further in time than the sp 500 or the nasdaq composite the djia has only been negative six times out of 30 and just once in 18 instances since 1950 given this history and the magnitude of this year’s selloff we are cautiously optimistic that 2023 will be a good year for stock returns from a technical perspective the current stock market remains weak at this point oga is looking for a sixth followthroughday ftd defined essentially as a large gain on heavy volume as is typical in a bear market the prior five ftds have failed by undercutting the previously established low it is worth noting that the average number of failed ftds in bear markets years is six excluding the outliers of 1987 and 2020 which were more vshaped recoveries and had no failed ftds when one includes those two bear markets in the sample the average number of ftds before the equity market turns is 45 however in deep bear markets such as occurred in 1973 2000 and 2007 it is not uncommon to see seven or more ftds before the market finally reaches a bottom currently leadership is narrow and confined primarily to energy and defensive ideas with some financials notably regional banks performing well recently technology and consumer cyclicals remain the most troubled consistent with a general “riskoff” environment the technology etf xlk  made a new 16month low relative to the sp 500 just this week we believe technology’s performance should bottom with the overall market given the damage done to stocks an ftd alone would not be enough to make us completely bullish we would need to see several additional signals emerge for more confidence these include a retake of not just the shortterm 21day moving average dma but also the 50dma and eventually the 200dma the sp 500 is 10 below the 200dma a break above the august 2022 peak would represent a higher high and could be the confirmation of a new more sustainable uptrend also we would like to observe much higher stock breakout totals meaning stocks emerging from technical price bases the line chart below shows our proprietary indicator of weekly stock breakouts in the us normally a breakout from a price base or consolidation results in a strong upward price move for a stock spikes in stocks breaking out are the sign of a healthy and rising market we would like to see a very large spike of breakouts not just an average total 100 to become more bullish historically these spikes tend to occur 46 months after market lows in conclusion the present stock market environment continues to follow an exaggerated version of normal second year presidency patterns given the declines experienced so far a fourth quarter relief rally would not be unusual however until the us market has a successful ftd and a large increase in stock breakouts we remain cautious about declaring that the final bottom of the bear market has been reached nonetheless if history holds after this year of declines 2023 offers potential for meaningfully better equity returns this article was coauthored by william o’neil co global sector strategist kenley scott mr scott lends his perspective to the firm’s weekly sector highlights and writes the global sector strategy which highlights emerging thematic and sector strength and weakness across 48 countries globally a key tenet of written research is utilizing the extensive william o’neil database to profile historical market cycles and stock and then attempt to draw relation to the current environment he also covers global energy basic material and transportation sectors and serves as a member of the global focus list committee which approves all equity recommendations for developed emerging and frontier markets after working as a commodities broker kenley joined the firm in july 2006 he has a bs in statistics from the university of california riverside and also holds a series 65 securities license no part of my compensation was is or will be directly or indirectly related to the specific recommendations or views expressed herein o’neil global advisors its affiliates andor their respective officers directors or employees may have interests or long or short positions and may at any time make purchases or sales as a principal or agent of the securities referred to herein