Last week, I wrote about the importance of understanding bull and bear market cycles to navigate the markets and also said that I wasn’t going to read too much into the market action of the first week of the year. This week I have some good news for stock market bulls. They can win (beat the market) this year if they buy into the right sectors and stocks.
The good news is the internals of the stock market have improved. In 2021, I warned multiple times throughout the Summer and Fall that the stock market internals were rapidly disintegrating to warn that the market was headed for either a serious correction (20%+) or bear market. Well, we got the latter, as the market averages turned down right at the start of last year. Declining internals were a classic sign of a coming market top and it happened.
By internals, I was looking at the percentage of stocks inside the NYSE above their 200-day moving averages. You can see how that fell in 2021, while the market continued to go up, to form a negative divergence. The good news is that in October the opposite happened. The internals turned up while the S&P 500 continued down a little bit more.
The action in the internals suggests to me that the US market averages are going to go sideways to up for at least the next few months. That doesn’t mean one should expect a massive rally like 2020, but some sectors will do well.
I noted last week how so many market gurus, of both the bull and bear camps, that I follow, were predicting that the market would fall in the first half of the year and then do well in the second half. They thought that the market would continue to decline, due to rising interest rates, and then explode in the second half when the Federal Reserve would have to lower rates due to a collapse in inflation or rapid decline in the economy. I mused that we may see the opposite happen – the market rally into the final rate hike of this cycle and then turn down after that. I also am skeptical that the Federal Reserve will lower rates this year as so many say they will, because officials from the Fed say they do not plan on doing that and would do so only as a last resort.
It’s possible that instead of huge extreme swings the market volatility actually contracts this year instead, with the S&P 500 not going through the highs or lows of last year. If that happens select sectors will make new highs and vastly outperform the S&P 500 and Nasdaq.
In my view we are actually in a secular bear market, like what happened from 1969 to 1982 with the financial markets, but that’s a bigger topic to leave for later. Cyclical cycles play out within secular cycles.
The point is I do not think we are going back to the way things were before 2022.
New leaders are already emerging in the market and the past fad winners of before, such as META, TSLA, GOOG, NFLX, ARKK, became horrible laggards last year and will continue to lag. The Nasdaq as a whole is going to keep lagging the DOW.
After the tech top of 2000, the popular big cap tech stocks of that day, such as CSCO, lagged for over a decade.
Everyone continues to be obsessed with stocks like TSLA and the tech big caps that keep lagging, and will continue to make the QQQ’s lag the S&P 500 and DOW-30.
While the chart of the NYSE internals are right on their November highs, the QQQ’s remain close to their October lows.
Most stocks are doing better than the popular big cap tech stocks.
The important thing is that the positive strength in the internals provides good evidence that buying is coming into the stock market, which can help it for the next few months.
That buying is going into new leadership sectors.
If bulls want to win they need to focus on these leadership sectors.
And even more buying is going into foreign markets, which are now performing better than the US stock market.
A big reason why is that the US dollar index has turned down.
The US dollar had a strong rally last year as the Federal Reserve launched its tightening cycle, with 3/4 rate hikes. Now that it has reduced the size of the hikes to 50 and is nearing the end of this tightening cycle, the US dollar index has turned down.
Gold and silver have done well, and mining and material stocks have been the best performing sectors in the market in the past three months.
Industrial stocks have done well too, and that is helping the DOW perform better than the S&P 500.
The emerging markets ETF, EEM, broke out last week above its December highs and through its 200-day moving average.
I fully expect that EEM will outperform QQQ and even SPY in 2023.
Really, I think all of these people obsessed with owning ARKK and QQQ would be best to just liquidate those positions and put the money in EEM and some of the metals ETF’s, such as CEF, GLD, or SLV. It is time to forget about these fads like robot cars and Metaverse and think about things that are used to actually produce things in the real world and grounded in reality.
Look at sectors that benefit from inflation – sectors that did well in the 1970’s.
I rather own shares of a steel or coal company than Coinbase!
Crypto is virtual toilet paper and no one wants the Metaverse, because the goggles make people sick and people don’t want to spend time turning themselves into a cartoon character freak, walking around with no legs in a virtual hell.
I own CEF and EEM.
I think this is going to be a year where money continues to get out of the past fad funds and stocks that are now horrible laggards and rotate into new sector leaders and even asset classes and world markets outperforming the US stock market now. That money rotation can help the DOW and S&P 500 continue to go up, but is also being driven by investors all over the world reacting to a falling US dollar index. You are investing in a global financial system and it was the macro funds that were the big winners last year.
I did a video update going through some of the leading sectors you can watch.
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-Mike
