Looking For Positive Signs
Taking the Contrarian Viewpoint

December 25, 2022

Weekly Market Outlook

By Keith Schneider and Donn Goodman


Gaugers, I hope you are having a good weekend celebrating the holiday. Once again, we extend our heartfelt wishes to you and your families for a healthy, happy, and peaceful holiday season.

There is so much to be negative about given the poor investment climate we have been experiencing most of 2022. However, instead of focusing on the continued negative state of the stock and bond markets, we thought we would spend time on some of the recent positives that have emerged as well as potential contrarian aspects of the markets that may deliver better investment cheer as we enter 2023.

Inflation Data is Starting to Show Signs of Slowing.

Friday afternoon the Fed’s favorite inflation indicator (the PCE-Personal Consumption Expenditures) came out for November and was slightly hotter than expected at 4.7% YoY versus 4.6%. However, what many missed (not the markets) is that 4.7% was less than the previous Fed’s December plan and what many believe was their expectations for their recent hawkish comments that accompanied a 50 bp raise two weeks ago. This is good news. See chart below:

There are signs of a fairly dramatic slowdown in Inflation.

Here is a chart of M2, the money supply, which has decreased significantly. This should have a positive effect on taking surplus money out of the Fed’s system:

Americans are beginning to curtail spending, something that the Fed would like to see more of:


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And one of the most significant contributors to Inflation during this cycle has been wage growth:

If this continues, this will undoubtedly be helpful in getting the Fed to slow down their future (2023) Fed Fund rate hikes. However, we do not see them pivoting to rate cuts anytime soon, at least not in 2023.

Late December has been historically a positive period. January is typically good too.

Friday, December 23rd started this year’s Santa Claus Rally (SCR) which will last until January 4th, 2023. This period is positive 78% of the time. Yale Hirsch (famous for the Stock Trader’s Almanac which his son Jeff now runs) began this observation years ago. This summarizes it best:

January also has a higher % rate of positive returns as evidenced in this chart indicating that the best odds for a positive return is the 2nd half of December (78% positive) followed by a 62% positive period during the first half of January:

The NASDAQ (tech stocks) had a brutal 2022 return, down so far 32.8%. There is a 50/50 chance that the NASDAQ is positive in 2023:

At MarketGauge we like to say that there is always a bull market somewhere.

As many of you are aware, we have several investment strategies that have produced positive returns this year and over longer term time frames. Our quant, algo based decision models caught several emerging trends throughout the year which included:  energy, oil company stocks, alternative energy, commodities, mining, and metals, rising interest rates, and other stocks and ETFs. You may be surprised to know right now there are 4 strong areas of the market that are above their 200-DMA. They include XLE (Energy), XLV (Health Care), XLP (Consumer Staples) and XLI (Industrials), and one of the positions in a MarketGauge strategy right now. See the chart below:

Referring to XLV, it finally made a new recent relative high and may be about to have a new breakout (and may be a positive area for investors as we head into 2023).

The US Dollar peaked on September 26th. Since then, it has declined by approximately 10%. Several sectors of the market have had good results. If you followed MarketGauge strategies, you would have been in several of these: 

A closeup shows the actual % returns of these areas:

Bearish indicators are starting to drag on longer than typically expected: 

With yet another week of bears outnumbering bulls, the record streak of negative readings in the bull-bear spread has grown to 38 weeks long; a full month longer than the previous record ending in October 2020. Historically, investor sentiment has acted as a contrarian indicator meaning low readings on optimism have typically been followed by stronger returns for the S&P 500.

Enhanced volatility usually is lessened during the second year of a bear market. Notice the below chart showing 2022 having similar volatility as 1974 and 2008. Notice the strength (new highs > new lows) the following year. Our hope for 2023.

The traditional 60 (stocks) to 40 (bonds) portfolio was a big loser in 2022. It should perform much better going into 2023. Bad 60/40 years are typically followed by positive ones (note 2009). See chart below:

The Mega Cap stocks are starting to become value stocks. (this commentary does not imply they cannot or will not go down further, but they are sitting at more attractive valuations)

 

Here are some additional observations from Big View:

Risk On

  • Volatility has decreased, and volatility ratios display less volatility for 30-day and 90-day periods. (+)
  • With the current price movement, the perplexingly low volatility is viewed positively, so lower volatility is a plus and viewed as risk-on. (+)
  • Value stocks (VTV) have found support at the 50-day and 200-day moving averages, while growth stocks are below both key moving averages. Value stocks are outperforming. (+)
  • Emerging and Developed markets (EEM and EFA) are outperforming US equities. (+) with EFA holding above the-200-day moving average and in a bull phase. (+)
  • Copper (COPX) is dominating the S&P 500, showing industrial strength building. (+)
  • DBA is still outperforming the S&P 500 and is in a confirmed uptrend. (+)
  • On a weekly basis, the US dollar has found support at the 50-week moving average and near the price level near the COVID highs. (+)
  • The TLTs and IEFs display a golden cross formation in the Real Motion Indicator showing improved momentum (+)

Neutral

  • US indices have moved in opposite directions over the previous week, with the Dow Jones rising (0.90%) and the NASDAQ falling (-2.51%), with many tech companies continuing to decline. The price action this week is neutral. (=)
  • Volume patterns confirm the mixed price action, with the Dow Jones displaying better volume characteristics over other US Indices.
  • Latin America, with Brazil leading and sectors like Energy following, displaying a renewed focus on commodity-based economies and inflation beneficiaries. (=)
  • Precious Metals, Water, and Agriculture were all also up on the week. Energy is slowly creeping up for the third consecutive week, and all sectors leading indicate global inflationary pressure. (=)
  • The Risk Gauges have improved to neutral. (=)
  • The number of stocks below key moving averages in the IWM has moved from negative to neutral, and any further strength would result in a positive reading. (=)
  • The intermediate bonds (IEF) mimic similar characteristics to the long bonds (TLTs), and both are finding support at their 50-day moving average and within the lower Bollinger bands. (=)
  • Except for Biotech (IBB), all family members have a divergence in the Real Motion Indicator, with the ones closest to a phase change, like Transportation (IYT) and Semiconductors (SMH), displaying a golden cross in Real Motion. (=)
  • Brazil (EWZ) led all country ETF performance by a large margin with 9.8% weekly performance, followed by Mexico at 4.6% (EWW), and the next highest country performance ETF was Austria at 2.6% (EWO). (=)
  • USO is in a trading range and outperforming the S&P 500. Oil looks poised to outperform equities and appear on the upswing. (=)
  • The breakout in the Yen is a significant change in Japanese central bank policy over the last week that is expected to have continued global monetary ramifications. (=)

Risk Off

  • Sector rotation points to risk-off sentiment, with Consumer Discretionary (-3.3%) and Semiconductors (-4.7%) underperforming sectors like Energy (3.2%) for the week. (-)
  • Market internals reveals continued negative readings for the S&P 500 and NASDAQ beneath the neutral line and overall negative readings with the McClellan Oscillator indicating stocks are being sold. (-)
  • The new high /low ratio for the NASDAQ and NYSE display ongoing negative readings. (-)
  • Utilities continue to outperform the SPY. (-)
  • The yield curve is still inverted but has drifted away from more extreme inversion levels and remains a credible indicator of a recession, although is a hard call to make regarding timing . (-)
  • Growth stocks (VUG) are bearish. (-)
  • Gold is consolidating at the 200-day moving average. (-)
  •  On a weekly basis, the US dollar has found support at the 50-week moving average and near the price level near the COVID highs. (-)
  • DBA is still outperforming the S&P 500 and is in a confirmed uptrend. ( -)


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