Investors Were Thankful This Week After Cooling Inflation Data.
Will We See Additional Follow Thru?

November 19, 2023

Weekly Market Outlook

By Donn Goodman

We wish you, our loyal readers and subscribers, a very Happy Thanksgiving Day!

We hope that you enjoy this day of gratefulness with family and good friends.  We thank you for being part of our extended family, and we look forward to continuing to earn your trust and loyalty.

Gaugers, we also hope that you had a prosperous investing week in the markets.  If you are following some or all of our investment strategies, we are confident you had good investment results this week as most, if not all, of our strategies have been performing well.

If you don’t have access to any of our investment strategies, what is stopping you?  Or, if you are a subscriber only implementing 1 or 2 strategies, you may be missing out.  We invite you to talk with Rob (Rob@MarketGauge.com) and go through the other strategies you may not be using to help round out and complement what you are doing.  You may not be aware that several of our strategies are up over 20% and more year-to-date.  We even have a stock strategy up approximately 40% year-to-date that doesn’t use riskier option strategies to do it.  Make sure you check in with Rob.  He can provide you with all the details.

Cooling inflation numbers fuel a big bull market day on Tuesday.

This week, the CPI came out lower than expected (Core stayed the same) and relieved investors of the potential pressure that the Fed may hike rates at their meeting next month.  See chart below:

This information prompted a huge rally in all types of bonds and lowered the 10-year rates significantly.   After hitting a high not seen since 2007 of 5%, the ten-year Treasury bond rallied all week.  Since early November the 10-year rate has now declined about 50 basis points.  See chart below:

This also caused the US Dollar to sell off as money fled safe havens and found its way back into risk assets, higher yielding bonds and equities.  As we discussed numerous times in this column over the past two years, a weaker US Dollar is GOOD for stocks as well as other risk assets and will contribute to the commodity super cycle (including Gold & Silver) that Mish has been projecting in her numerous “on-air” appearances of late.

With bonds rallying and the dollar sinking, stocks gapped up from the start of the day Tuesday and put in the second best daily stock market performance since much earlier in 2023.

See the US Dollar chart below which coincides with this recent rally in risk assets:

It is estimated that $23 billion of the $6 trillion in money market funds sitting on the sidelines found its way back into the market.  We saw significant inflows into the market this week.  These were also the second-best inflows of the year, matching what took place back during February’s explosive stock market move higher.  See chart below:

This is a good sign, but can this upward move continue?  We will address shortly.

Soft Landing?

Since early November, the US stock (and bond) markets have been sending a very clear message.  The positive market sentiment recently is signaling that investor bets believe the Federal Reserve is done hiking interest rates that were necessary to rein in inflation.

This week’s CPI and PPI data indicated that price surges are beginning to ebb and the economy is slowing as the Fed intended by raising rates for the past 20 plus months.  In fact, surprisingly, some of the economic analysts and investment houses are even putting wagers on a rate cut for early next year.

We remain of the opinion that we will likely see higher rates for longer.  Additionally, a dramatic difference of opinion remains between market pundits who believe we are headed for a recession soon and those who believe the Fed has commandeered a “soft landing” and the economy will stay on a growth trajectory right up until the 2024 Presidential election.

This week, the head of the world’s largest retailer even went so far as to predict that consumer prices could soon drop.  “We will be managing through a period of deflation in the months to come,” Walmart Chief Executive Officer Doug McMillion said during the company’s earnings call.

Zero Chance.

Something truly amazing happened in the rate futures market this week.  The 18-month nightmare of second-guessing the force on how much and how high the Fed will hit the brakes seems over.  The Fed’s hawkish sentiment seems to have hit a pause button.  Will it be permanent with the next phase prompting rate cuts?

The Futures markets are now implying a ZERO implied CHANCE that the Fed will tighten next month.  See the chart below on the implied future rate hike expectations:

Not time to celebrate yet!

We remain somewhat skeptical.  Given the persistence of inflation and the geopolitical risk in the Mideast and its potential ramifications on world energy prices, we are going to stay neutral and say, “only time will tell if we don’t see any more Fed hikes.”

Certainly, inflation could rear its ugly head again, and I say this with the knowledge that we have a labor shortage in this country, and that may likely keep employment robust and wages inflationary.  There are other inflationary prices at work as well including (but not limited to) food prices, which we do not see declining anytime soon.

This week’s market rally was broad based.

During most of 2023 we have heard about the Magnificent 7 fueling the majority of the S&P 500 cap weighted index return.  Statistics show this to be fairly accurate.  Even with this week’s massive rally, the equal weighted S&P index (RSP) is still flat for the year.  See illustration below:

However, the bullishness in the market has been broadening out.  A good sign indeed.

In fact, the MarketGauge investment strategy Profit Navigator, which uses two distinct engines, went bullish in late October.  Several subscribers wondered how this technical model could turn positive during a market in decline.

The interesting aspect of the algorithms that drives the process in firing the two engines is that they are sensitive to broad based shifts in investment sentiment and the technicals underlying the market.  As it turned out, perhaps a bit early, these signals were quite predictive and caught the recent two-week rally.  (for more information about this dynamic investment strategy, contact Rob at Rob@MarketGauge.com).

We provide a couple of charts showing the performance of the market and the more broad participation of stocks in the S&P.  See below:

Can the upward bias of the stock market continue?

Yes.  We have pointed out in previous Market Outlooks, along with a wide multitude of charts and graphs to show that we are now in the best 6 months for investing (November to April).  The seasonal upward bias is upon us.

Given inflation cooling, interest rates coming down, the recent weakness of the US Dollar, weakness in the price of oil (Oil fell from $85 to $72 per barrel), and so far, geopolitical risk not spreading, we are in a more positive environment for stocks.  These are all important inputs that may prompt stocks to run further.

Earnings are essential.

According to FactSet, 94% of S&P 500 companies have reported their Q3 2023 results, with 82% beating their earnings estimates and 62% reporting revenues above their estimates.  These are better than analysts’ early 2023 expectations and are certainly contributing to the upward bias of good quality stocks and their influence in the rise of the major indices.

Additional signs that we may have more upside potential!

Additional signs are also providing empirical evidence that we are in a “bull” market that began in early 2023.    Here are a few of the charts that support this notion:

The industrial sector is important as no single stock has a big weight.  See the XLI picture from All Star Charts below:

On Wednesday, Ryan Detrick of The Carson Group came out with this supporting the recent rally in stocks:

Seasonally, the US Dollar tends to get weaker at the end of the year.  That should help propel stocks higher.  See graph below:

And of course, the composite of the Magnificent 7 made a new all-time high this week (Alphabet, Amazon, Apple, Microsoft, Netflix, Nvidia, and Tesla).  See chart below:

In addition to these new highs, a bullish sentiment reading, huge inflows into the market and a good seasonal period, we also track some proprietary indicators (these will soon be available to subscribers of MarketGaugePro.com).

One of our favorite illustrations is the # of stocks above their 50- and 200-day moving averages for the NDX (NASDAQ 100) and the S&P 500, among others.  Here are the charts from Friday’s close.  The 50-day moving average is a short-to-intermediate investment period.  You will notice on those charts that the color has been blue and in a positive period since before the end of October.   The charts indicating the number of stocks in the indices above the 200-day moving averages are longer term investment indicators.  As you can note below these have begun to gain a positive bias (turn up), indicating a positive technical picture for longer-term investors.  See all of these below:

The # of stocks above their 50-day moving averages:

-
The # of stocks above their 200-day moving averages:

The Market rally was not unexpected. 

If you are a frequent enough reader of the weekly Market Outlook, you are well aware that Ryan Detrick of The Carson Group is one of our favorite market technicians and historians of the Presidential Market Cycle.  Earlier in the week he shared this graph with his readers:

Growth over Value.  The yellow arrows point to growth stocks outperforming value.  This illustration demonstrates that we are in a risk-on period.  Notice the recent performance when growth stocks (Vanguard Growth ETF-VUG) got knocked down.  Those periods when value, illustrated by the Vanguard Value ETF-VTV outperformed.  This period was plagued with higher interest rates and a stronger US Dollar.  Let’s hope growth continues to outperform.  See chart below:

A few cautionary signs.

We would be remiss if we did not point out a couple of cautionary signs that could occur to stop this rally in its tracks.  These include the following:

• Geopolitical risk spreads. This could include more severe action in the Mideast, Ukraine or even some problem with China and Taiwan.
• Energy prices spike, most specifically oil prices go up. This could be because of the aforementioned point or perhaps the OPEC nations cut back production.  This would be inflationary and stall the cooling inflation rhetoric.
• Inflation has a hiccup. That might prompt the Fed to regain a more hawkish approach.
• Stocks are overvalued and may need to pull back if the earnings expectations for 2024 do not support this bullish thesis. In our estimation, the market currently is selling for over 20x current earnings and probably 18.5x-19x if earnings were to grow by 15%.  That is not likely.  So, the S&P 500 at current earnings is more likely fair value at 3800-4200.
• Last, there are a few blaring gaps in the recent activity of the S&P 500. Most gaps, especially this big, get filled within 60-120 days.  While nothing is guaranteed, we want you to know that these (blue circles) gaps attract money to the downside.  See illustration below:

We turn it over to Keith and his team and the all-important BIG VIEW bullets.  Thank you for reading.  Have a safe and enjoyable Thanksgiving holiday and don’t forget to reach out to Rob if you wish to obtain additional information on any of our investment strategies and trading tools.

Risk On

• All four indexes had huge moves for the week with three out of four in bullish phases but the move is not “overbought” yet (+)
• All sectors were up for the week, led by retail and homebuilders, pointing to stronger economic fundamentals and risk-off sectors were the weakest, confirming risk-on (+)
• Alternative energy dominated the weekly gainers favoring a risk-on scenario. KRE (Regional Banks), which had been a drag on the market, was one of the biggest weekly gainers (+)
• All three moving averages for new highs / new lows are stacked and sloped in a bullish configuration for both the SPY and QQQ (+)
• With the exception of high yield debt vs bonds, all the risk gauges are positive (+)
• Cash volatility falling is consistent with overall market direction (+)
• The number of stocks above key moving averages flipped from oversold readings to positive readings in the SPY, although running a bit rich on a short-term basis (+)
• Sentiment readings are positive with plenty of upside before reaching an overbought condition (+)
• Growth stocks hit a new 2023 high this week and continue to outperform relative to value stocks, which despite the performance this week (remain flat on the year (+)
• With interest rates backing off this week, the Dollar gapped lower which was bullish for equities in general (+)
• Five out the six Modern Family members are showing leadership vs the S&P with semiconductors leading and on new year-to-date high on Friday (+)

Neutral

• Russel 2000 is in a weak recovery phase and if it can clear 200 DMA above $191.04, it would be an important confirmation for the overall up-trend in equities (=)
• Despite the runup in the markets, volume readings backed off to mostly neutral (=)
• Potential divergence in McClellan Oscillator as it did not confirm new highs, but until the market takes out the midpoint on the oscillator, it remains at a positive reading (=)
• Mixed read on interest rates with short-term rates failing to take out its 200 DMA by Friday's close while longer-term rates eased and closed above their 50 DMAs (=)
• Small caps, most susceptible to higher rates, had a historic strong thrust +7.12% this week, however, they remain in a recovery phase (=)
• Despite soft-commodities lagging the S&P, DBA remains in a bull phase with a critical triple top overhead resistance at $22.50 (=)
• Gold and Oil remain under pressure on a relative basis, though both recovered their 200 DMA by the close of Friday (=)

Risk-Off

• Despite the big run-up in housing (XHB), copper remains under tremendous pressure and in a bear phase (-)

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