Today is the first trading day of March, 2023, but before we think about that I want you take a deep breath and think back to where we where at New Years. I know we have seen some selling in the financial markets and gold in February. We also have seen some really bad inflation news. Now coming into this year, I was hearing a lot of the experts predict that inflation would rapidly decline back down to 2% this year. That was the Cathie Wood line, but many of the bears I listen to also were thinking that inflation would come down as a result of recession.
Inflation did not continue to come down in February despite the Jerome Powell usage of the phrase “disinflation” in January.
Around New Years, most people were bearish on the market, thinking that the market would decline in the first half of the year and then provide a great entry point. I was hearing both bulls and bears say this. That is what I want you to remember.
Instead, the market rallied hard in January and we got powerful technical confirmation that the bear market of 2022 was over with the “breadth thrust” indicator. The percentage of stocks above their 200-day moving averages on the NYSE rose into the end of the last year. When that indicator went down in 2021, even though the market averages continued higher for a bit, that was a huge warning sign to us.
So, the action in these indicators was a huge bull sign.
One thing – people saw big gains in the market averages in 2021 and and then a huge decline in 2022. Big swings came to be what people expect, but the market is actually not swinging big right now. The volatility in the markets is actually shrinking, and you can see that with the 200-day Bollinger Bands on this chart and how they are coming closer together.
The markets are not trading like they did last year or the year before. Don’t be surprised if this low volatile drifting action doesn’t continue for weeks, if not several months, from here. There are countervailing forces keeping the market in a range. On one hand, earnings were indeed sluggish, when measured by revenues, and stocks are overvalued on every fundamental metric. Rising rates is now creating an attractive alternative to stocks in the likes of guaranteed 4.50 – 5% twelve month gains in bonds and CD’s.
Why risk a big draw down many are saying when they get an easy return?
That’s how you get headlines like this:
Steve Eisman of ‘The Big Short’ fame is buying bonds ‘for first time in a long time’. Says days of tech stocks beating market are over – MarketWatch
At the same time, the inflation is real and that means money expansion. Rates still aren’t above the inflation rate and more money is going into the markets than out of them, despite the “uncertainty.”
When you accept that we in a stagflationary environment then the economy makes sense.
My guess is we may see the markets remain locked in a range now until we get to the last interest rate hike of this cycle.
A month ago that looked like that could be coming in March, but now it looks like June or July.
Sideways drifting markets are notoriously difficult to trade and I have been stepping back from them in February as a result.
They also aren’t exciting for people to hear about.
As for the worst case scenario?
Well, the breadth thrust is still valid.
Every time there was a breadth thrust, like we saw in early January, the market was higher substantially 12 months later in the history of keeping track of the market internals.
The worst case scenarios for it though is something like what happened in 1962, as this chart shows the worst market performance after a breadth thrust signal.
That’s basically a chart that is essentially a double bottom.
That could happen in the coming months, but as the way things are now I doubt it.
Most likely the market will stay in the range, not doing much, until it makes a big move out of the range later in the summmer.
The problem is, unless you are day trading, the market doesn’t have much short-term upside here, so there isn’t much to get excited about for now.
The time to have bought was in the fourth quarter and early January.
The sideways action needs to play out more, or there does need to be a bigger dip, before another compelling entry comes.
A final thought….where higher yields help….
Bank Index to SPX.— Helene Meisler (@hmeisler) February 25, 2023
This is the chart to watch. pic.twitter.com/WG6romp3RH
Banks stocks are outperforming the S&P 500.
It is the things, like ARKK and crypto, with flat lined relative strength, that remain those most vulnerable to falling the most if the market merely retraces more of its gains from its October lows.
Let’s see how things play out the rest of this week.
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