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I hope you had yet another positive investing week. Thanks for visiting with us for a few minutes. Let’s embark on the weekly outlook together. The markets continued to grind higher, albeit a bit quieter. On Friday, stocks faded into the close but still eked out a small (0.1%) gain for the week.

The good news, as you can tell from the headline above, is that the S&P 500 entered a new bull market from the October 2022 lows.

The End of the Bear Market

Besides a 20% rise from the lows, there are signs that we are likely at the end of the “bear” market. We have posted a number of charts supporting this over the past few weeks. We have also shared positive prognostications from people like Ryan Detrick (of the Carson Group), that provide statistical evidence of what happens when returns have produced positive returns at certain points beginning and continuing through the first half of the year.

Please review our previous pieces to revisit these forecasts. Many of these charts, like the one below, show what might occur after the 20% rise from the previous market bottom.

Please pay attention to the periods above including 1974 (stagflation) and 2002 (reemergence of the bear), when technology stocks continued their decline from 2000-2002. These two periods resemble, in some fashion, the dynamics playing out in the current market environment.

Managing Director of Banc of America Savita Subramanian (Barron’s top 100 most influential women in Finance) stated, “after crossing the +20% mark from the bottom, the S&P 500 continued to rise over the next 12 months 92% of the time (vs. 9% average overall) based on data going back to the 1950’s.”

According to AAII (American Association of Individual Investors), bulls outnumber bears for the first time in 18 months (this is a positive sign).

What Sectors are Fueling the Returns in 2023?

The following chart illustrates what sectors of the S&P 500 are providing the most returns so far in 2023.

The number of stocks that are below their 50-, 100-, & 200-day simple moving averages (SMA) is improving.

As expected, the Information Technology (XLK), Consumer Discretionary (XLY), and Communication Services (XLC) sectors have more than 50% of their stocks above these important moving averages, and they are still leading the markets higher.

Leadership is Broadening Out

We have written on numerous occasions that this has been a very narrow market. I am confident that you have read your fair share of media concern that this rally has been only concentrated in the top 7-15 mega-cap stocks driving the index. The good news, thus far, is that leadership is broadening out, and market capitalization is beginning to rotate.

Non-participants so far this year, small- and mid-cap stocks began a snapback rally this past week. It was a good week for both areas of the market, and this is a good sign.

Some Factors That Could be Helping to Drive the Markets Higher

Over the past few months, we have addressed numerous ongoing economic concerns that we (and the rest of the world) have.

These factors include continued high inflation (and stagflation), higher corporate operating costs, lower earnings expectations, lowered market valuation, consumers pulling in spending, energy costs, purposeful higher unemployment desired by the Fed, parts of the economy that may have added friction (commercial real estate), and the many indicators that illustrate our slowing economy. 

So given these factors, what is fueling the stock market’s move higher?

After the March-May regional bank crisis, along with recent economic numbers that show the persistence of inflation, one would have to look at the Fed’s balance sheet and its recent and positive effect on providing liquidity that inevitably is showing up in growth stocks and providing the recent strength in the stock market.

Behind the Scenes

Here are some important charts showing that while the Fed continues to drain liquidity from their balance sheet, they are also in the background providing liquidity into the emergency lending facility, which is being used by institutional and retail customers for money market inflows. (Money markets are continuing to grow and now have more than $5.4 trillion in them).

This is proof that consumer sentiment remains negative and is helping to drive money into money market funds. However, that is also just one symptom of the non-trust consumers feel about keeping their money in regional as well as large banking institutions. These banks are either raising security issues or, in the case of large banks, paying a negligible amount of interest to their depositors.

While the Fed is providing liquidity, especially for the emergency bank funding program, they are subsequently selling off securities in an attempt to drain liquidity and keep their commitment to QT (Quantitative Tightening) as part of reducing credit demand and slowing down the economy.

There are very clear signs that some of the Fed’s expansion of their balance sheet is showing up in stocks. 

What’s Next? Why We Think Caution is Still Advised 

There are signs that this market rally may be a bit overdone and stretched. There may be a good reason for a pause or minimizing risk in the near future. We only share this narrative (and charts) to provide a fair and balanced approach to our investment perspective. We thank Minaz Hassam for his contribution with these charts.

The CNN Fear and Greed index shows extreme greed, and some of the components of that index are screaming “caution is advised.”

Here is how that indicator has played out over the past year.

The S&P 500 Index is currently sitting at resistance. Will it break through?

One of the major contributors to the Fear/Greed gauge above is the volatility index (VIX).

Typically, when it trades this low and with an absence of fear, it triggers a potential “buy” signal in volatility (that means increased near-term risk).

However, other analysts and market technicians may point out that the volatility index can stay lower for longer, and it has demonstrated this in the past. These unusual periods, as evidenced above, might only need short-term consolidation and/or a small correction to build a long-term healthy market.

One of our favorite analysts, Ryan Detrick, CMT (of Carson Group) is great at putting market conditions in perspective. This week, he stated:

“The VIX closed beneath 14 for the first time in more than 3 years today (June 7). Longest streak above 14 since 5 plus years ending 8/13/12. Did you know the S&P 500 gained 18.3% the next year after that sub-15 print back then? Yeah, low volatility isn’t always a bad thing.”

Even though it seems like so long ago, many investors vividly recall the 2007-2009 great financial crisis and their stock market losses that took years to recover from. The bear market of 2022 likely created and recalled similar fearful memories. These memories can have long-term effects on an investor’s psyche.

This tweet, with its commentary and illustration, sums up investors’ fear of loss quite well and provides some healthy bullish context.

The Fed is Meeting This Week - More Volatility Potentially

The upcoming Fed meeting this week is going to be the first in years where there is no clear consensus on the interest rate decision. Every meeting since the Fed began to raise rates has had a clear group consensus. Now futures show only a 25% chance that rates will increase and a 75% chance that they don’t. Interest rate decision consensus will be difficult to achieve going forward. This is likely to spur more volatility, not less.

Our take: The Fed may “pause” on raising their overnight lending rates when they meet this week. However, unlike other organizations, we do not think they are done. We would rather see a 25 bps or even 50 bps raise and then be close to done.

The market may interpret a pause positively, but their language and dot plot (future expectations of potential future raises) could be perceived as negative. The Consumer Price Index news released on Tuesday may sway their consensus view for Wednesday.

Now, here is a summary of some other factors that may influence the market.

Risk On

• The key indices were mostly flat this week, with the exception of the Russell (IWM), which was up about 1.65% on the week and led the market for the first time in months. Meanwhile, the S&P 500 (SPY) and Nasdaq (QQQ) looked to be digesting their recent runup, and this could potentially even indicate a market rotation from large-caps back to small-caps.
• Volume patterns have clearly improved across all key indices with, hardly any distribution days relative to the number of accumulation days over the past two weeks.
• Friday saw SPY, QQQ, and DIA play a bit of catch-up after lagging the IWM all week, with those indices having accumulation days on Friday while IWM took a bit of a rest.
• Both the Technology sector and Semiconductors (SMH) took a bit of a hiatus this week, while Consumer Discretionary, Retail (XRT), and Homebuilders (XHB) all led. One of the only 2 sectors that were marginally down on the week was Consumer Staples (XLP).
• Developing countries with a focus on commodities, such as Latin America (ILF) and Africa (EZA), appear to have outperformed US equities this week.
• Both the S&P 500 and the Nasdaq Composite got slightly overbought, but they are still overall in positive territory.
• The new high/new low ratio exploded to the upside this week for both the S&P 500 and the Nasdaq Composite.
• Volatility readings have continued to hit new lows and are currently at their lowest level since February 2020.
• The number of stocks over their 10-, 50-, and 200-day moving averages within the S&P 500 remains at an overall positive level. However, on a short-term basis, this may be a bit overbought.
• After lagging for most of the year, IWM is now showing short-term leadership over both the S&P 500 and Nasdaq.
• Growth stocks (VUG) continued to hold up at important support levels relative to the S&P 500.
• Emerging Markets (EEM) has remained above its 50-week moving average and continued to outperform more Developed equities (EFA) on a relative basis.

Neutral

• The 20-year treasury bond (TLT) looks to be bottoming out here at the bottom of its long-term wedge pattern, and it could easily see another leg up next week.
• Soft Commodities (DBA) broke out of its six-week wedge pattern and is looking potentially explosive as long as it can clear the highs that were set in mid-April. However, on a weekly timeframe DBA closed at its highest level in nearly a year.

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