Celebrating the All-Stars Winners!

June 16, 2024

Weekly Market Outlook

By Donn Goodman


Welcome back loyal readers.  Glad to have you with us.

We consider those of you who follow us and use our investment tools, models and useful trading ideas to be among our own All-Stars Winners! And we appreciate you!

We also want to celebrate the hard working, dedicated fathers that follow us.  You are also our All-Star Winners.  We wish you a Happy Father’s Day.  Your families are blessed to have you.  We wish you an enjoyable and relaxing Father’s Day.   To your family and friends, you are their All Stars.  Keep it up.

This week’s economic backdrop.

It was an interesting week that began with updated inflation (CPI) news. A flat monthly number (year-over-year unchanged at 3.3% inflation rate) helped prompt a drop in the 10-year yield and fuel enthusiasm that we may see an early fall (September) rate cut.

Couple that with dovish rhetoric from the Federal Reserve midweek, and the odds of seeing such a cut as early as September appear to have increased to a better than 60% chance.

This writer is not so sure and remains skeptical.  The mantra “higher for longer” remains.  While it is certainly possible that a rate cut comes sooner than later, we still believe that the data dependent Fed will not see enough signs of a slowing economy until well into the fall.  We would welcome a rate cut but our belief is that the Fed may wait until after the election and not act until year end.

While the monthly number may have been flat, Inflation continues to be elevated on an annual basis, and there are signs that food costs along with insurance costs (which affect every American) are still increasing, and those are important components of CPI (and PPI) which will put pressure on near-term inflation numbers.

Due to the perception that the month over month inflation numbers within the CPI were flat and inflation is trending down, the bond market rallied this past week.  See chart below:

Yields. Positive data on inflation drove yields on 2-year and 10-year Treasuries to the lowest since early April and late March, respectively.

Whether it is sports, business or life, All-Stars play a pivotal role.

Like a lot of you, I am an avid sports fan.  I enjoy being a spectator of a number of professional and amateur sports.  My son played Lacrosse during his high school years, and I really enjoyed watching the sport.  Fast, action packed and never a dull moment.

As a Cleveland sports fan most of my interest lies in our three professional sports teams, the Browns, the Cavs and the Guardians (formerly the Indians).  Additionally, I am a fan of college football and basketball.   I never grow tired of watching an exciting game.

I now understand why attracting and keeping the All-Stars is so important.  No matter what sport, it is usually the All-Star players that propel the team to get to and participate in the quest for a championship.

Without LeBron James, there is no way that the CAVS would have won the NBA Championship several years ago. The same goes for the Patriots with Tom Brady or the Chiefs with Patrick Mahomes.  I don’t remember too many teams competing and winning the whole thing without 1 or 2 All-Stars.  Certainly, the Boston Celtics are not the same team in the current NBA finals without their All-Stars, Jason Tatum and Jaylen Brown.

The stock market is not too different.

I worked for 24 years with a large-cap stock investment manager headquartered in New York.  The firm manages billions of dollars in one equity investment portfolio made up of approximately 45 stocks.  It was always approximately 10% - 20% of the portfolio that fueled most of the yearly gains.   Each year it was the All-Stars in the portfolio that fueled the most positive performance of the total portfolio.

So why own so many stocks? 

Most investment managers choose to be overly diversified, not knowing which stocks will be this year’s All-Stars. That is also why most, if not all, money managers only produce returns close to the benchmarks/indices that they choose to replicate.

I thought there was a better way.   And there is.

One of the major reasons I was attracted to working at MarketGauge is because of the quant driven investment models where the proven algorithms can select what might be the next All-Stars and then position the assets in these stocks or ETFs.  That is why our concentrated portfolio methodology over time works better.

Also, by utilizing risk management tools, each portfolio is uniquely positioned to exploit its All-Stars and take advantage of intermediate to longer-term trends.  Each model has a different investment edge so that when blended together (in our MG All-Weather Portfolios), multiple strategies usually produce smoother performance outcomes.

If you are not yet aware of our various investment models, please contact us ([email protected] or www.marketgauge.com/call) to review our different stock and ETF investment models.  These models use concentration in individual stocks and/or sectors as a strength and manage the risk of concentration better than the “old school” approach which is to diversify into more positions.

As just one example, our ETF Sector Plus has been invested in semiconductors for a long period (since mid-2023) and our individual stock programs have owned Nvidia off and on since early last year.

We are rolling out a new NASDAQ investment strategy called “NQ3” that has been back-tested using a different algorithm methodology than our other investment strategies.  This 3 stock portfolio owns the BEST ALL-STARS and has demonstrated a propensity to capture significant gains from owning the best of the best All-Stars.  Back-tested results show an annual return of greater than 35% on this portfolio.

As the All Stars change, so does MarketGauge’s NQ3 portfolio. The table below illustrates the top 7 performing Nasdaq 100 stocks, and the “popular Nasdaq All All Star stocks” since 2017.

These two groups of All Stars are ranked by performance since 2017. MarketGauge’s NQ3 model would rank #3 in performance among them.

To our point above about managing risk, the max drawdown is also listed. This is the equivalent of the biggest “bear market” correction that an investor would have experienced to achieve the returns. On this basis, the NQ3 system is clearly #1 with the lowest max drawdown.

Not shown here is the fact that the QQQ’s performance would be a 295% return with a max drawdown of -36%.   

One message illustrated here is that embracing the market’s All Stars can give you a real investing edge when you manage risk to mitigate the All Stars’ inherent volatility.

Another message, not explicitly shown here, is that All Stars often outperform in down years. This was the case in 2022’s bear market and 2018’s flat market.

After a 66% return last year, this investment strategy is currently up (real-time, real dollars) 33% year-to-date.

If you would like more information on this strategy, there is a webinar replay here (for a limited time). If you’d like to speak to someone about All Star based strategies, please reach out to Rob Quinn, Chief Market Strategist via www.marketgauge.com/call or [email protected].

The S&P 500 is driven by All-Stars too.

Whether it is our successful investment models or just owning an index fund like the S&P 500, a small group of stocks usually inevitably drives performance. This is especially true when evaluating an index like the S&P 500, which is capitalization weighted. As a result, the bigger the company, the larger its weighting in the index.

Let’s take a look at the S&P 500 All-Stars and what is currently driving the index year-to-date performance which is up as of the close on Friday approximately 14.1%.   Below, we have provided the top 30 stocks, by weighting (portfolio %) that make up the S&P 500.

While there are 500 stocks in the S&P 500, these 30 stocks comprise approximately 51% of the weighting of the index.  We have provided the company, the current % of the S&P 500 that each stock comprises, their current Market Cap and the stock’s YTD return from the close on Friday June 15, 2024.

How All-Stars, Semiconductors, and AI determine the market’s performance 

Four of the top 30 stocks are directly involved in semiconductor manufacturing (NVDA, AVGO, AMD & QCOM).  If you add Apple and Google, both companies that manufacture their own chips as well, there are 7 of the top 30 companies involved in semiconductors.

Also, if you factor in that Nvidia is up 166% and makes up more than 7% of the cap weighted S&P 500, that means that Nvidia alone is responsible for 11% of the S&P 500 return of 14.1%.  Hard to believe that one stock is responsible for the majority of the index return YTD.

This is also why this past week most stocks in the S&P 500 were down, but because Nvidia was up each day along with a few other mega cap stocks like Microsoft or Apple, the S&P closed higher.

We provided the contribution (and Tesla’s negative contribution) to the S&P 500 return below to give you some added perspective of the All Stars leading the way!

In essence, if you owned the top 7 stocks of the S&P 500 above, your return would be equal to or greater than the S&P 500 index year-to-date. This is because many of the remaining 493 stocks have contributed little to no positive or negative returns YTD. The stocks below the top 50 have such small weightings that their collective returns are approximately equal to the top 7 stocks.  This is a proper description of the power of All-Star Investing.

Consider that the top 7 companies by market cap in the above list (of the 500 that make up the S&P 500) are all involved in Artificial Intelligence, and that is all you need to know to understand anything AI is now being rewarded through major stock price appreciation.

The biggest All-Stars right now are about Semiconductors and Artificial Intelligence (AI).

No other area of the market is benefiting more right now than the semiconductor area and specifically anything even remotely engaged in building out AI (Artificial Intelligence).  We have been covering this in the past few weeks. If you somehow missed our mantra on investing in Nvidia or Sister Semiconductor stocks, please use the following link to last week’s article and in turn that article has several links to previous articles about CHIPS.

We provide the following chart to illustrate that unless one is invested in the semiconductor All-Stars, not much else is working for the moment.

It is all about the top 10% All-Stars.  See below:

Top 10 vs. bottom 490. "The gap between winners and losers is as high as it has ever been."

The momentum in technology stocks is holding up the markets. Semiconductor and AI stocks just keep on moving up.  See chart below.  

Tech momentum. "The Tech sector is really climbing ... current rolling 30-day% change is slightly > 22%. Looking back at history, we've seen that in the 2020 and 2009 bear market recoveries, the early 2000s (many bear market rallies back then), and late '90s."

Record inflows to technology stocks, ETFs and mutual funds are helping to keep the momentum going, especially with the top 30 mega-cap All-Stars. 

Given how popular Nvidia and other AI related stocks are, there is a heavy dose of FOMO (fear of missing out) going on about getting invested in the current All-Stars.

According to Goldman Sacks Rubner, "Global equity funds have seen $190.5 Billion inflows YTD. This is the second largest equity inflows on record (only 2021 saw more inflows). This is +$1.7B worth of equity inflows per day."

It is important to understand that with those kinds of inflows coming into tech stocks and index ETFs like the S&P 500, more of the money is going to go into the largest weighted stocks. This further proliferates the appearance of the markets going up, even though right now we are seeing deteriorating breadth in the markets as many of the stocks within the 500 Index are falling while the few All-Stars continue to go up.

We are already way above the S&P 500 targets.

At the beginning of each year, every firm’s economic and market analyst post their yearly expectation for end-of-year S&P 500 Index targets.  Right now, at the current valuation, the S&P 500 is above every price target from these gurus that put out their calls at the beginning of 2024.  The question remains, where might we be heading for the remainder of the year?  See chart below:

SPX vs. Wall Street. "At 5,431, the S&P 500 is now above every 2024 year-end price target from Wall Street strategists. And there’s still six and half months to go."

If you are a frequent reader of this column, then you know that we have been predicting an 8-9% growth rate in earnings.  As referenced below, almost every Wall Street analyst now expects double digit earnings growth expectations for the S&P 500 for 2024 and 2025.  We think that may be a bit rich.  See below:

Household net worth near record highs.

Most investors, including the many millions invested in 401k programs, are either directly or indirectly invested in the S&P 500 and, therefore, are participating in the big 7 tech stocks.  They also benefited from these past 18 months by seeing an increase in their equity portion of their investment portfolios.  (Unfortunately, they have made nothing in 3 years in their bond allocation).  Add to this the value of their household real estate also contributing to an increase in their net worth. You can easily see how this has helped create a positive wealth effect for the average investor.

This is helping to keep consumer sentiment high and retail sales robust.  See the illustration below:

Wealth effect. "The value of equities and household real estate have substantially contributed to the surge in net worth, which stands at a remarkable 7.6 times disposable income.”

Again, we hope that you all have a fantastic Father’s Day and enjoy being with family and friends.  Please remember that we are here to help you improve your investment outcome.  You are our All-Stars. You allow us to do what we love and you keep us in business.  We are grateful for each one of you.

Thank you for reading and have a good week ahead.  Good luck with your investment activities.

 

 

 

Risk On

  • On a shorter-term basis, the NASDAQ 52-week New High New Low ratio held up better than the other indexes (+)
  • Sentiment, as determined by volatility, is in a bullish mode, as volatility has remained low, confirming price action. (+)
  • 1-Month vs 3-Month volatility continues on its bullish track (+)

Risk Off

  • Despite the strength in the S&P, the McClellan Oscillator deteriorated further, highlighting the disparity between price action and participation. (-)
  • 52-Week New High New Low ratio, despite the S&P closing on new highs, continues to deteriorate. (-)
  • Large-cap foreign equities, dominated by countries in the EU, drove EFA into a warning phase with emerging markets also underperforming the U.S. (-)
  • European stocks got crushed this week across the board, as they digested right-wing gains in the elections. (-)

Neutral

  • Bifurcated price action with the SPY and QQQ making new all-time highs while DIA and IWM both closed in warning phases. (=)
  • Volume patterns mimicked the price action with strength in SPY and QQQ and more distribution days in DIA and IWM. (=)
  • A mixed picture with half of the sectors tracked closing higher, led by Semis and Technology, and the other half down. Consumer discretionary closed up while consumer staples closed negatively. Transportation broke down into a distribution phase. (=)
  • The cumulative Advance-Decline line is on the verge of breaking down under an important pivot level established in May. (=)
  • Growth stocks continue to outperform value and the S&P 500 Index, but is overbought on both price and momentum, suggesting it is primed for some mean reversion. (=)
  • 3 out of the 6 members of the modern family broke down, with Semiconductors still pushing new highs, though overbought on both price and momentum. (=)
  • Soft commodities are in a bull phase, holding up in terms of momentum and on a relative basis compared to the S&P. (=)
  • Gold is stuck in a trading range that we highlighted last week. A breakout through the highs should be followed or a breakdown from late-April lows would indicate a potential intermediate top in Gold. (=)

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