October 29, 2023
Weekly Market Outlook
By Donn Goodman
Hello Gaugers. Hope you have weathered the volatile and negative stock (and bond) markets. We have described the negative cycle trends that can and do often take place in September-October. 2023 has certainly been amplified.
As all of us are traveling to The Money Show in Orlando (and I am sitting in a flying cylinder as I write this), this will be a shortened version of Market Outlook for this week. We hope that maybe you will be attending The Money Show this weekend through Tuesday and we may even get a chance to visit. If you are at the Show, please track us down. Mish is also speaking at several panels, workshops, and presentations. Hope you can attend!
As scary as Halloween can be, there is a lot going on around the world that may be scarier, including the economic uncertainty that plagues the United States at this time.
October has exceeded the scary expectations many pundits had about the potential downdraft of this historically weak and negative season.
So far in October, the major indices are down more than 3% month-to-date, with the Dow Jones down the least (-3.2%), the NASDAQ 100 (-3.6%) heavily influenced by the mega cap technology stocks (GOOG, NVDA, TSLA, MSFT, AMZ, AAPL and META-the Magnificent 7), who so far have reported better than expected earnings, except TSLA and GOOG which had mixed results. The S&P is down 3.9%, influenced by the 35% cap weighting of those same 7. The Russell 2000, the small cap index (IWM) is down over 8%, heavily influenced by the effect rising interest rates will likely have on these businesses, which are more dependent on financing and are more heavily leveraged than the cash rich mega caps.
Interest rates most dramatic effect is on smaller companies.
Last week we went into detail about the rise in interest rates and its potential effect on Price-Earnings ratios of the market and, more specifically, how analyst have to readjust their earnings expectations on companies including, cost of financing debt, inventory and reducing the leverage on their balance sheet as a result of higher interest rates.
During much of 2022 and now since July 2023, the negative pressure on the stock markets has been the rapid rise of interest rates (earlier this week the 10-year touched 5.0%) and the strong dollar as investors around the world chase the high interest rate returns of money market funds and short duration bonds. (Money market funds with assets well over $6 trillion continue to see huge inflows). See the 10-year rate rise (TNX) as well as the US Dollar (UUP) increase in the graph below:
There is a very distinct and clear (negative) correlation between a strong and rising US Dollar and the sell off in the stock market. See chart below:
Nowhere has this been felt more dramatically than small cap stocks which are underwater year-to-date by 7% or more. (The IWM small cap index is down 6.9% year-to-date). Let’s take a look at a few Russell 2000 (IWM) small-cap stock graphs:
So far, over the past 5 years, small-cap stocks have produced a 0 return. See graph below:
Large versus small cap stocks.
As noted above, there is a wide divergence between large cap and small cap stocks. In her brilliant assessment of the inner workings of the markets through her Economic Modern Family, Mish often points out that without participation of Grandpa Russell, it is hard for the markets to stay positive. This could not be clearer in the recent collapse of small cap stocks and their large cap counterparts. This is one of the biggest divergences in a few years. See the charts below:
Folks, I urge you to talk with us about our Small- Midcap Earnings Growth SMART Investment Strategy. Year-to-date it is still up over 30%. Using MarketGauge Pro’s Active Risk Management (ARM), this strategy incorporates STOPS and PROFIT TARGETS. Through September 30, 2023 (some of this is hypothetical performance of the back test and some real time), the 5-year performance is 311.7% versus 4.8% for the Russell 2000 index before fees. Please reach out to Ben or me at [email protected] or [email protected] if you would like additional information.
Tech stocks have held up better than the rest of the market.
Of course the NASDAQ 100 lost more than any other part of the market last year (2022) so it would likely seem probable that it would snap back the most. Early 2023 gains were also amplified when the excitement of AI came out. Many of the magnificent 7 are those companies that are already using AI in their businesses and prospects for future growth remain elevated. Nonetheless, the NASDAQ 100 has gotten hit pretty hard lately. Right now very few stocks are above their 100-day moving averages. See graph below:
A look at the S&P 500 Index.
The cap-weighted index made up of the largest 500 stocks has been falling since the last high on July 31, has now fallen 10.3%, and is now officially in CORRECTION MODE. (the small-cap IWM is now down 18.3% and close to signaling a bear market. To look at the stair step drawdowns that have taken place in the S&P 500 so far this year, look at the following graph:
What is perhaps even more interesting is the disparity between the equal-weighted S&P 500 index and the effect of the Magnificent 7 Cap Weighted S&P 500 index below:
Another important aspect of the Economic Modern Family is the role that Transportation stocks play in either confirming or denying the broad market’s health. This would include trucking, automobile, airlines, and other transportation related companies.
Again, one of the oldest indicators used on Wall Street is the Dow Jones Theory which says that Transportation stocks have to confirm the Dow’s movement by closing at or near a high. The current health of the Transportation sector is in question. See chart below:
Additionally, Mish often discusses on her national TV appearances and through her daily writings about the important 23-month business cycle moving average and the market.
For illustration purposes, I have provided two charts. The first is a monthly chart of the S&P 500 with the blue line the moving average of the 23-month business cycle. Uncanny that we stopped right on it Friday.. The other of the 3-year moving average. Both telling the story that an imminent slowdown is forthcoming, likely accelerated by rising interest rates (even with a good positive GDP number for September). See charts below:
Some analysts view this correction as a positive sign of the bull market that started in October 2022.
See graph below:
Will we get the November Turn? (Reasons to remain positive and stay ready to put $ to work)
There is significant information we will now present to show that this October weakness usually stops and early November we get the turn. We have no idea if this will in fact occur. But many of our favorite research firms, including our friend Jeff Hirsch at Traders Almanac and Ryan Detrick of the Carson Group, would like us to think so.
We offer the following charts to support the prospect that we MAY be getting ready for the best 6 months for stock market investing that MAY lie ahead:
We hope that you have enjoyed reading this week’s Market Outlook. Have a good week. Stay patient and vigilant for any true sign of a possible turn in the market. (One way is to consult Big View often and read Mish’s Daily). Stay safe and optimistic that things can and will improve.
Happy Halloween.
Risk-On
Risk-Off
Neutral
Every week you'll gain actionable insight with:
