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To the men and women of the Armed Forces: thank you for your service to our country. You have made a national promise to defend our freedoms and protect our way of life. You are the men and women who answered our call to duty, and you have served with distinction. Your courage, your sacrifice, your patriotism will never be forgotten.

This past week was an unprecedented one after the malaise the markets had been going through over the past 16 months. Our quantitative and dynamic investment strategies once again identified emerging trends and momentum that allowed our readers and investors to reap the rewards from a few stocks/ETFs that had parabolic type moves.

Economic Update

US inflation and consumer spending accelerated last month, highlighting steady price pressures and demand that might force the Federal Reserve to keep tightening -- something we have repeated in this column recently. Coming in at 4.7% year-over-year, the PCE indicated that inflation is persistent and not coming down anywhere close to targets soon.

Many in the media, along with economists and analysts at major firms, have been talking about the low chances of additional Fed interest rate hikes. In fact, many of these same people have been forecasting interest rate cuts in the second half of 2023. We have pointed out that interest rates are likely to stay higher for longer.

Now the “betting” community has once again turned hawkish by the wholesale inflation numbers reported this week. The odds have now risen to 58% that the Fed will raise again at their next Open Market Committee Meeting in June and possibly July.

I recall Mish telling her followers and readers back in late 2021 that when inflation spikes, it is very difficult to bring down. With 10 unprecedented Fed hikes in a 12-month period, and inflation not trending down as expected, you may expect the Fed to cause more pain before things get much better.

The Fed’s hikes have led to an extremely inverted yield curve, as measured by the 10-year Treasury minus the Fed Funds Rate. This is one reason why we maintain a position that a recession may be baked into the cake.

Since 1971, this spread has inverted 7 times, and each time was followed by a recession. That is a perfect track record. The chart below shows this relationship since 2000, with the last 3 recessions marked in gray. It also illustrates how deep the inversion is currently.

The Early-in-the-Week Head Fake

Our commentary last week included some technical interpretations that the markets were not seeing robust participation, and the breadth of the markets was weak. One might have concluded that the markets were headed for a correction.

In fact, in evaluating many technical indicators that a large number of investment folks utilize, you might have concluded that the “range-bound” markets were still bouncing off of resistance at 4200.

Then we got stellar, unexpected earnings from several companies, including Nvidia (NVDA), and the markets shook off the malaise and took off, yet again. The broad market (S&P 500) finally had a close above 4200, the top of the range that it had consistently been bouncing off.

This Week’s Big Winners

The big winner was the Nasdaq 100, with semiconductor and tech stocks up over 3% for the week, while the Russell 2000 (IWM), Dow Jones (DIA), and S&P 500 were essentially flat on the week.

As previously pointed out, it was the mega-cap technology stocks that won out over the last week. In our different investment strategies, we owned several of these, including Nvidia, which was a ballistic rocket. Nvidia reported earnings on Wednesday night, and long before the market opened on Thursday, it was up over 25% in the pre-market.

I do not believe there is a time in history that a company increased its market cap by $250 billion in one day. It was such a big bump that the market cap appreciation from that one day was worth more in market cap value than the whole value of 9 other large companies.

Additionally, our readers and asset management clients were the other winners. Exposure to these explosive trends has led to a profitable week. Our investment strategies recognized the start of these trends a while ago and rotated to these growth areas of the market.

The Big Mega-Cap Stocks Just Keep Getting Bigger

The mega-caps’ influence on the indexes' performance is not limited to Nvida, and it’s at a record high. Five stocks, Alphabet, Amazon, Apple, Microsoft, and now Nvidia, make up more than 23% of the S&P 500 (cap-weighted) index.

If these seven stocks (META, AMZN, MSFT, AAPL, GOOGL, NVDA, and TSLA) were an index, it would be up 44% this year. If you remove these stocks from the S&P 500 this year, the index is up just 1% this year. This means that the remaining 493 companies in the S&P 500 are up just 1% year-to-date.

A huge difference can be seen between the S&P 500 Cap Weighted (SPY) and the S&P 500 Equal Weighted (RSP). 

The markets are very narrow. This has caused many technical analysts to conclude that we were not seeing enough broad participation in the market, and soon they would have to fall. Many of the comparisons of the S&P 500 cap weighted versus the equal weighted index have supported this. No other year comes close to seeing the influence these mega-cap stocks have right now on the index.

Beginning in February, the S&P 500 began its ascent, driven heavily by a few large-cap stocks as outlined above.

Year-to-date, the big winner thus far is the Nasdaq 100. The tech heavy index with the mega-cap technology companies and semiconductor stocks, the current darlings of the investment world, continues to shine. Also, any mention of the AI (artificial intelligence) space has provided the tailwind for these stocks to begin selling at very lofty prices.

The Dow Jones Industrial Average and small-cap stocks (small companies) are areas of the market that are not currently participating in this tech-driven rally.

However, if you look closely at the comparison of the Nasdaq 100, which is also cap-weighted and driven by the biggest mega-cap stocks, versus the Nasdaq 100 Equal Weighted (QQEW), you can see the same conclusion as the S&P 500 chart above outlined. Beginning in January, the mega-cap stocks took off.

Remembering the Past: Are We Setting Up For a Bubble?

I had the privilege of working for a growth manager during the 1990’s when the internet was a fairly new invention. I remember all too well that we had significant positions in the internet infrastructure build out stocks like Cisco (CSCO) and Qualcomm (QCOM) as they made similar parabolic moves back then.

Please note that these charts are split-adjusted, and back in 1999, these prices were many hundreds higher and unprecedented. Qualcomm was increasing its market cap by 2x on some days. Back then, these were operating in rarified air -- similar to what we saw in Nvidia this past week.

Speaking of 1999, currently the three-month differential between the SPY and the RSP is the widest since 1999.

It is important to catch these trends. I bring this up because it is important to stress that locking in profits (pre-determined targets) is paramount for building wealth.

We cannot forget the past. I vividly recall the number of investors who told me back in the early 2000’s, “that they were grieving at their lost profits.” Are we in an AI bubble? I don’t know how the market reckons with stocks like Nvidia that make the largest jump in market cap in one day. However, if you look at this current period versus the late 90’s, it doesn’t appear that we are in a bubble as yet.

In fact, semiconductor stocks, due to some of the latest technology improvements, the build out of larger US factories, and their use in new AI technology, may just be getting started on a new innovation cycle.

Where Do We Go From Here?

As many of you may know, I am an ardent fan of looking at the past and what recent history tells us about what we might see going forward. One of the best at this is Ryan Detrick (previously of LPL and now at the Carson Group), who conducts research on how the current market may resemble the past. We like to show his work from time to time.

The first item that caught our attention is the fact that we put in a significant low in October, 2022 and haven’t had another one since. To Ryan and a host of others, this implies that we started a new bull market and are unlikely (in their opinions) to see another low anytime soon.

Moving forward, having the “last low” so far in the rear-view mirror portends good things in the future, as evidenced in the following chart.

Secondly, this past Thursday was the 100^th trading day of 2023. When the S&P 500 is up greater than 7% at the 100-day mark, that usually means favorable stock market performance for the rest of the year.

Lastly, when the Nasdaq 100 makes a new 52-week high after not having one for at least six months, that typically is evidence that bigger gains are going to come in the future.

This week’s summary (shown below) was contributed by Holden Milstein.

Risk-On

• It was a strong week for the major market indices, with new 2023 highs seen in the S&P 500 and Nasdaq 100, which remain in strong bullish phases. Although they aren’t at the same level as SPY and QQQ, the Dow Jones and Russell 2000 both held support this week, with DIA bouncing off of its 200-day MA and IWM regaining its 50-day MA.
• Unlike the S&P 500, the McClellan Oscillator for the Nasdaq Composite has improved along with the price, and it is almost back in positive territory.
• Risk gauges appear to remain in fully risk-on mode.
• The SPY vs. utilities (XLU) ratio is at its most blown-out level since October/November of last year, indicating a risk-on environment.
• 20-year Treasury bonds (TLT) weakened further this week and tested the lows of the 2023 trading range while also potentially breaking to the downside out of a long-term consolidation pattern. However, TLT became oversold on both price and momentum, which means there may be a bit of mean reversion in the near future.
• Growth stocks (VUG) continued to outperform value stocks (VTV). This was especially evident this week, with VTV confirming a bearish phase while VUG continued to set new highs.
• US markets are now outperforming foreign equities (EEM and EFA) on a relative basis.
• Soft commodities are in relatively precarious positions after this week, with agriculture (DBA) losing its 50-day moving average as support on both price and momentum, and copper (COPX) at risk of losing its 200-day moving average on both price and momentum. However, copper appears to have gotten oversold and may be subject to mean reversion.

Risk-Off

• The short-term vs. mid-term volatility ratio (VIX/VXV) broke down a bit this week despite the move higher in the market. This is a short-term bearish indication that is likely influenced by rising concerns over the US debt ceiling.
• Other than some slight improvement on Friday, the percentage of stocks within the SPY and IWM indices that are above key moving averages actually decreased this week on both short-term and long-term timeframes.

Neutral

• Even though prices surged this week, there was still relatively weak volume across the indices, with the Nasdaq being the only index with more accumulation than distribution days over the past two weeks.
• Semiconductors (SMH) and technology (XLK) are the clear leaders of the market, as nearly every other market sector was down on the week while tech soars.
• The new high/new low ratio for the Nasdaq Composite shows a decrease in the number of stocks above their short-term moving average, while a continual increase can be seen in the number of stocks overtaking their mid- and long-term moving averages. This may be emblematic of just a handful of large-cap holdings leading the move higher in the Nasdaq.
• Gold (GLD) continued to break down further as it has been making new lower lows beneath its 50-day moving average. However, it appears deeply oversold on both price and momentum.

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