November 8, 2023
(IT’S A GREEN LIGHT FOR THE MARKET ACCORDING TO THIS INDICATOR)
November 8, 2023
Hello everyone,
A reliable and rare market indicator is flashing green meaning we may well see good times on Wall Street for the next 12 months.
This market indicator is called the Zweig Breadth Thrust.
It flashed a buy signal last Friday for only the 18th time since 1945.
When this happens the S&P 500 averages a 23.3% gain over the following 12 months and is up 100% of the time, history shows.
The gauge – a ratio developed by famous investor Marty Zweig – is used to determine market momentum, particularly the start of a potential move higher. This signal is triggered when the ZBT rises from less than 0.4 to more than 0.615 within 10 days.
The thrust is calculated by:
Determining the ratio of advancing New York Stock Exchange listed names to the total number of rising and declining issues
Then find the 10-day exponential moving average of that ratio.
Put simply, it’s when you go from very oversold to very overbought in less than two weeks.
This by signal came as the S&P 500 wrapped up its biggest weekly gain of the year. The index rallied 5.9% last week, marking its largest one-week surge since November 2022. That move followed the Fed hinting it may be done raising rates.
The idea that the Fed may be done (we don’t know that for sure)
The idea that the economy is rebalancing normally (and not going straight into a recession)
Both are significant.
The technical signal mostly suggests that there is a lot more buying pressure coming in. In other words, an end-of-year rally is still quite likely.
Some analysts believe the S&P 500 can end 2023 between 4,600 and 4,700. This implies an upside of 5.5% to 7.8% from Friday’s close. The index would then close out the year up 19.8% or 22.4%.
Remember that the Zweig Breadth Thrust is just one indicator. The market could be impacted by numerous factors before the end of the year.
Have you heard of Digital Ocean?
It’s a Cloud Computing platform that is at an attractive entry point right now, according to Goldman Sachs.
Analysts have a price target of $33.00 which implies the stock could jump 38.4% over the next 12 months.
Analyst, Gabriela Borges, cited the stock’s significant underperformance as an opportunity for investors. The stock is up 6% this year, while the Nasdaq Composite has gained 30%.
Borges believes the business is now approaching a cyclical trough. Furthermore, she goes on to say that the structural improvements that DO has made to its mix and cost structure will become more obvious, driving better revenue growth, and continued (free cash flow) and margin expansion.
According to Borges, the underperformance has likely been due to a cyclical normalization in cloud optimization spending. She argues that this trend has been particularly acute in areas where DO has outsized exposure, such as video games, streaming, and web agencies. Borges estimated that Digital Ocean’s organic revenue growth rate, excluding M&A and pricing, has slowed from 36% in the first quarter of 2022 to low single digits in the third quarter of this year.
The analyst points out there are positive catalysts ahead for the business, including Digital Ocean’s better-than-expected revenue and earnings for the third quarter and the company’s contributions from its newer initiatives. These initiatives include DigitalOcean’s July acquisition of Paperspace, which should expand the company’s artificial intelligence and machine-learning capabilities, and its ongoing ramping of Cloudways, a cloud hosting and SaaS provider for small-to-medium-size businesses acquired last year.
A new CEO is yet to be announced, and until that happens, analysts do not see a material shift in DigitalOcean’s strategy.
Second Quarter 2023 Financial Highlights:
Revenue was $170 million, an increase of 27% year-over-year. Annual Run-Rate Revenue (ARR) ended the quarter at $682 million, representing 25% year-over-year growth. Gross profit of $102 million or 60% of revenue.
Digital Ocean (DOCN) Trade Idea
Stock Price $26.38.
January 19 (DOCN) $25/$27.50 vertical call spread at a cost of $1.30 (do not pay more than $1.40)
For those who want to be more aggressive, you can look at doing
January 19 (DOCN) $27.50/$30.00 vertical call spread at 0.88cents (do not pay more than 0.95cents)
McDonalds (MCD)
If you took advantage of the McDonald’s trade, I outlined two to three weeks ago, then don’t forget to look at taking profits.
I gave the option of a 250/260 DEC call option spread or a 250/270 DEC call option spread.
MCD is sitting at $268.96 as I am writing this newsletter.
Cheers,
Jacquie
