We hope you are enjoying these warm summer months. Perhaps your own profitability from the stock market is helping you to enjoy this positive period even more. We congratulate you if you are diligently following some of our investment strategies, and we hope that they are performing well and making your task of investing successfully that much easier.

We are grateful and humbled by the many positive accolades we receive weekly. Our mission is to not only create investment success for do-it-yourself folks, but now we have fully transitioned into being able to do it for you and assist you in managing your precious assets or retirement funds. Our goal is to make it easy (and effortless) for you to execute our proprietary investment methodologies for your long-term investment success.

What’s the Stock Market’s Next Move?

Fortunately, for the past few months, we have provided more positive input in readers' investment game plan and have backed these constructs with countless charts and graphs. In looking back, the charts from Ryan Detrick of Carson have probably been the most accurate and helpful as they showed what the market tends to do after being up 10% in the first few months.

Fear continues to dominate some of the financial publishing rhetoric. I remain baffled and amazed at the large swath of writers who continue to offer a negative view even while the market makes new 52-week highs weekly. Many of these prognosticators were correct in 2022, consistently warning that we were about to see a bear market. They earned some credibility, and readers began to hang on to their every word. But many have been wrong in 2023.

The problem with their numerous negative theses is that the stock market (and earnings) tend to go up 70% of the time. Additionally, as we have pointed out week after week, we are in a pre-election year. The bias for the third year of a Presidential term has been positive (since 1950, 100% of the time). Take a look at the chart below (which I helped create from my old firm, Atalanta Sosnoff Capital):

The Signs Remain Positive

No matter how much fear the writers, talking heads, and negative financial publishers amplify, the market continues to grind higher. More importantly, the underlying health of the market has continued to improve these past few months.

Yes, we may see a much-needed consolidation or correction soon, but most of the signs suggest that it may be shallow. Additionally, signs of a recession have not (yet) materialized. And while we may be pushing that off into some future moment (like 2024), this past week’s GDP of 2.4% growth handily beat the 2.0% expectations.

It is important to remember there is approximately $4 trillion in infrastructure, CHIPS, and anti-inflation bills that were passed during 2021-2022, and much of that money has not yet found its way into the economy.

No matter how much the Fed raises rates and how much Quantitative Tightening the Fed imposes, we are still awash in new monetary stimulus coming from the federal government. Add to that the existing COVID-19 money that remains in the economy, and you have the recipe for a continuing tight job market while consumers are still actively spending. Retail and consumer spending are holding up some parts of the economy.

Here are other signs that the stock market is still on solid footing (thanks to LPL for producing great research this past week):

1. Broadening participation.

The narrow leadership (i.e., the seven magic stocks) no longer holds true. The Equal Weighted S&P 500 index (RSP) is now closing the gap.

2. We went from bad breadth to good breadth.

The average stock in the S&P 500 is now trading above its 200-day moving average. This is a sign that breadth has improved and is positive. Should we go into a correction, it will take a lot to start knocking these stocks down when the breadth is so positive. Take a look at each industry group below with a comparison of November 2022 to now (July 2023):

Below, we also provide a view of the S&P 500 index (all 500 stocks) above the 200-day and 50-day moving averages. These charts continue to show a positive and expanding bias. We consider the positive blue slope to be a guide to take a "risk-on" position.

The number of stocks in the S&P 500 above their 200-day moving averages is illustrated below.

The number of stocks in the S&P 500 above their 50-day moving averages is also detailed below.

There is little doubt that the number of stocks above these vital moving averages is getting a bit stretched or overdone (as compared to similar periods in the past). A period of consolidation or even a correction may be helpful to take some of the “froth” out of the market.

3. The advance-decline line remains positive and is showing good health for the markets, as well.

The chart below shows the two-year cumulative advance-decline (A/D) line for the SPX. The line is calculated by taking the difference between the number of advancing and declining stocks in the index for a given trading day and adding that difference to the prior day’s value.

A rising A/D line is indicative of positive market breadth (as shown in the chart above as well) as the number of advancing stocks is outpacing the declining stocks.

4. Participation is global.

The US equity market is not the only place to find a bull market. Global (including emerging) markets are also doing well, with several major indices recently hitting important new 52-week highs.

This includes the MSCI All Country World Index ex-USA. This index is comprised of over 2,300 stocks (large-cap and mid-cap companies) doing business in 22 of 23 developed markets and 24 emerging market countries. As shown below, the index recently broke out from a long triangle to hit a new 52-week high.

5. Semiconductor stocks recently broke out compared to corporate bonds.

The semiconductor industry is the lifeblood of the technology and AI revolution. Mish likes to monitor semiconductors as an indication of the health of the economy and the markets.

Today, you can find these chips in just about everything manufactured, and therefore, they give an indication as to how well the products they are in are selling. On Friday, Intel was up big on a recent earnings surprise, another welcome indicator for this technology and AI fueled rally. Take a look at the recent semiconductor vs. corporate bond chart below:

6. Bullish investor sentiment is pulling new money into the markets.

In this column for the past few weeks, we have discussed how investors are investing based on the fear of missing out. These investors have been putting money in the stock market that had been sitting in money market funds. Estimates are that money market funds are still awash with over $5 trillion parked on the sidelines that is not yet in the market. This could make the market rally much further, especially if these investors really feel like they are “missing out.”

As mentioned above, fear is a powerful and negative influence. Yet, investor sentiment, as measured by the AAII-American Association of Individual Investors, remains bullish (positive)

Should we enter a correction later this summer, this could help buffer the downside. Take a look at both the bullish and bearish investor sentiment charts displayed below. You may notice the high correlation of the S&P 500 performance to the bullish/bearish investor sentiment indicators.

Blowing Our Own Horn

Let’s face it, if we don’t blow our horn, who will? Our calls on the market have been spot on most of 2022. Between this column and Mish’s daily works, we have interpreted the market internals and investor sentiment fairly accurately.

How is that possible? We follow our own tools, and we watch diligently for signs of overall market health. However, we are not prognosticators. We have stated this fact consistently in previous outlooks.

The truth is that we have no idea of the direction of the market (S&P 500) for the remainder of 2023. Fortunately, we have very good tools that we have built to monitor the internals of the markets. More importantly, we rely on these tools and avoid second-guessing what the inputs say.

You may ask, how are these strategies doing? We are happy to provide you with year-to-date performance numbers through Friday, July 28, 2023, which are displayed below. Note that these numbers do not include possible management fees if MGAM or another RIA is managing these strategies and do not include slippage which could negatively or positively affect the net returns.

Additionally, you may not be aware that the long-term performance numbers as compared to their respective benchmarks (like S&P 500 or Nasdaq 100) are simply incredible. Several of the above investment strategies were minimally negative in 2022, as were a couple that were slightly up or flat for the year. This defeated the narrative that the financial industry put out that wanted you to believe that all investors got hurt during 2022.

Now here is the rest of the story.

Risk-On

• All 4 key US indices are up on the week, with a new closing high seen in the S&P 500 (SPY).
• The S&P 500 regained its leadership relative to utilities (XLU) and has improved our risk guage back to risk-on.
• Semiconductors (SMH) were strong and put in new highs while utilities sold off, which is a positive sign for sector rotation.
• Foreign equities including China (FXI), Vietnam (VNM), and Africa (EZA) significantly outperformed relative to US equities this week.
• The US 20-year Treasury bond (TLT) has gotten deeply oversold on both price and momentum, as it bounced at the end of the week from long-term support and even appeared to have potentially put in a shorter timeframe double bottom.
• Even with the Fed raising short-term rates again, the yield curve inversion improved slightly.
• Growth stocks (VUG) are on the precipice of outperforming the US benchmark on a relative basis, while value stocks (VTV) are equally as close to losing their leadership relative to the US market on a short-term basis.
• Both semiconductors and transportation (IYT) were on fire this week and seem set to continue making new 2023 highs. Meanwhile, regional banks (KRE) also continued to recover steadily for the entire month of July after breaking out of an inverted head-and-shoulders bottom.
• Foreign equities led by emerging markets (EEM) continued to lead relative to US equities over the past few weeks.
• As we highlighted last week, US oil (USO) looked strong and has gotten continued follow-through on its breakout this week.

Risk-Off

• Volume patterns weakened for the key indices with the exception of the Dow, which is still showing four accumulation days compared to only one distribution day over the past two weeks.
• The 52-week new high/new low ratio looks toppy for the Nasdaq Composite.

Neutral

• The week ended with an inside day for all 4 key US indices on Friday.
• According to the number of stocks above key moving averages, the Russell 2000 (IWM) continued to improve while the S&P 500 deteriorated this week.
• Gold (GLD) is rolling over a bit in the short-term, but it tested and bounced from its key 50-day moving average to end the week still in a bull phase.

More By This Author:

On A Winning Streak! Many Market Signs Appear More Bullish
Inflation Drops, Stocks Pop Time to Celebrate? Or Not?
A Summer Full Of Travel, Leisure, And Buying Stocks Again - But Is It All Smooth Sailing?