Slowing Inflation, Market Consolidation
More Fun At The Beach!

August 13, 2023

Weekly Market Outlook

By Donn Goodman and Keith Schneider


Things we will cover in this Outlook:

  • Recent Economic Data
  • Interest Rates and Oil prices
  • Consumer Confidence
  • Volatility
  • Seasonal Weakness
  • Tech Stocks
  • Profit Targets
  • Reasons to Stay Positive
  • Bull Market Corrections

Hello Gaugers.  We hope that you had a safe, productive, and enjoyable summer week.  Thanks for tuning in with us.

Our hearts go out to the people of Hawaii and especially Lahaina.  We (and other friends) have spent time there.  In our best recollection, like most of Hawaii, it was an older, beautiful community made up of gracious and kind Hawaiians, many of them natives who were committed to providing services to tourists who visit yearly.  Most of these folks had small private businesses and were providing selfless service to visitors.  Many of these people have nothing now.  Over 80 souls have perished.  Please keep them in your thoughts and prayers.

The economic data continues to show a slowdown.

The stock market was on edge earlier in the week awaiting data on the CPI (Consumer Price Index) on Wednesday and the PPI on Friday.  The PPI, (Producer Price Index) is the more closely watched indicator by the Federal Reserve.

The CPI rose 0.2% for the month of July and 3.2% on an annual basis.  Excluding food and energy Core CPI rose 0.2% month-over-month and 4.7% year-over-year in July.  This was a slight downtick and softer than expected. (The market cheered).

The PPI in July rose 0.3% from the previous month and 0.8 from the previous year.  This was a slight uptick and a bit “hotter” than expected. (Interest rates rose and the market was slightly down).

Weekly jobless claims rose by 21,000 from the previous week bringing the total for August 5th to 248,000, higher than expected.  This also showed that the employment picture is beginning to slow.

Oil inventories rose by 5.9 million barrels last week, but crude oil prices rose $2.21, ending the week at $82.76 per barrel.  Energy prices have been trending higher.  This is concerning, as it inevitably will put pressure on the upcoming month’s inflation readings.  Energy prices continue to hit consumers in their wallets.  Analysts also believe this is directly tied to retail.  Consumer discretionary and retail stocks are showing signs of weakness and a slowdown in spending.  See oil chart below:

As we demonstrated last week, interest rates (specifically the 10 and 30-year) are trending higher.  Much of the above data is tempering proof of any kind of slowdown that the Federal Reserve has been working towards.  If anything, some of those numbers (PPI ticking up) are pushing interest rates higher (the 10-year rate is close to a new high).  Are we seeing a top in interest rates or a breakout with higher rates to come?  See chart below:

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Inflation expectations.

Chairman Powell of the Federal Reserve always includes language in his speeches and post Federal Reserve meetings about CONSUMER INFLATION EXPECTATIONS as a leading indicator for actual inflation.

One of the main reads on inflation expectations comes from the University of Michigan’s Consumer Confidence survey.  The most recent University of Michigan survey came out Friday morning.  It showed that consumers’ one-year forward inflation expectations are now at 3.3% year-over-year.  This was below the consensus economist’s estimate for a reading of 3.5%.

What is most significant about the 3.3% number is that it is below the 45-year average reading of 3.6%.  This means that consumers have gotten more sanguine about inflation compared to last year when these same readings routinely came in above 5%.  See charts below:

What this more importantly implies to us is that the average consumer believes that the economy is going to slow down over the next few years.  This may be primarily because they are feeling the “pinch” themselves and believe something has to give.  Most consumers do not think the rise in prices is sustainable.  This also implies that many consumers might think a material slowdown or even recession is in the cards. This figure can cut both ways, positive and negative.

The Dog Days of August.

As we noted last week, we are seeing the signs of the summer trading malaise.  Given the lower trading volume in the various markets, any movement (up or down) is amplified.  As noted in last week’s Market Outlook (if you missed last week’s commentary, here is the link), volatility usually picks up at this time in the summer.  See chart of recent activity below:

Last week we also showed a few charts indicating the seasonal weakness of August and September.  While pre-election years (the 3rd year in a Presidential Election Cycle) are almost always positive for the S&P 500, the seasonal weakness in late summer and early fall, typically happens.

Last week ended with a whimper as the S&P 500 and the NASDAQ ended slightly lower and the Dow notched another positive week.  See more on the NASDAQ below.  This investment period, in pre-election years, is typical to find a CONSOLIDATED market digesting the gains made in the previous 7 months.  Actually, we are right on track.  See chart below of the typical pre-election investment year:

August has its own historical cycle bias.  If history is any indication, we should get a bounce sometime over the next 1-2 weeks.  See chart below:

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What’s Next for 2023

Additional historical statistics illustrate how the markets fare from August 11 to the end of the year AFTER certain year-to-date returns have been achieved.  These historical indications show a positive bias for the remainder of 2023.    See chart below:

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The NASDAQ 100 (QQQ)

Tech has been the best sector to be invested in 2023.  We all know that.  Through July 31, near all-time highs, the NASDAQ 100 (QQQ) was up 44%.  Today (August 11 close), the QQQs are up 37% after selling off over the past two weeks.  Can tech stocks hold here?  Or, is there more downside to come?  We provide some evidence of a likely scenario (we don’t have any idea where these stocks are headed).  See illustrations below:

We are often asked, “are technology stocks priced too high or do their earning support this?”

These are great questions, and we don’t have all the answers.  However, we have lived through many of these strong tech cycles (like 1997-1999) and busts (2000-2002) and have seen tech stocks fall out of favor quickly.  Tech stocks are always priced at what investors think they are worth (and are willing to pay up for).  Momentum plays an important part in this.  This year (2023), it has been much about AI and its future impact on technology.

These abrupt selloffs are one of the very reasons we emphasize risk management in the MarketGauge investment strategies.  It is why we have profit targets on all our investment strategies.  These are designed to take profits off the table knowing that investors could witness a quick sell-off. We provide two examples of recent stocks that the MarketGauge investment strategies have recommended purchasing (or that we have purchased for our asset management clients). NVDA was purchased in February, and we still have ¼ invested. We are currently up 56.8% on this position.  (From NASDAQ All Stars investment strategy):

Another example of a stock is META. Purchased in April, we still have ¼ invested.  We are currently up 34.0% on this position.  (From Large-Cap Leaders investment strategy):

There are other signs pointing to continued weakness in the Technology Sector (XLK-ETF).  Here is one chart that conveys potential weakness in Tech stocks.  Remember, as noted above, we are in a seasonal period of weakness or a “sideways” move.  So be careful.

Another point (below) is even if you own the S&P 500, you own 27% in technology stocks.  And that accounts for some of the weakness in the S&P 500 index the past couple of weeks.

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So where might be more attractive places to invest?

Year-to-date laggards, value and energy stocks have held up well over the past few weeks.  Please note the Illustration below of what stocks have been performing the best recently:

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Why we remain optimistic about the stock market for the remainder of 2023.

There are a host of reasons why we remain positive about the stock market’s prospects for the remainder of 2023.  We pointed a number of these out in last week’s Market Outlook.

Here is a recap of just a few of the indicators creating our positive bias.  (Of course, anything can occur including geopolitical issues, natural catastrophes or acts of terror which could derail our enthusiasm).

  1. Many economists, including the mega banks, JP Morgan and Banc of America, have changed their belief that we will experience a recession. These financial giants have created a positive spin on the economy.
  2. The Federal Reserve may be done hiking rates which could move us to a more stable and positive interest rate environment.
  3. The economy is showing suitable signs of slowing. This helps push the narrative that we are going through a “soft landing”.  This may help keep stocks from going down.

Additionally, two important variables provide additional optimism: historically high money market funds and positive investor sentiment.  Both reasons could send the markets to new highs later this year.

Let’s explain.

An abundance of money is still on the sidelines.  This past week money market funds ticked up yet again, showing that many investors are out of the market OR, that they have only contributed a partial allocation of their assets into risk oriented assets.  See chart below:

If investors felt better about the economy or perceive the stock market as more reasonably valued, they would move additional assets (or some) to the market.

There have been investors that experience FOMO (Fear of Missing Out) and have been trickling their money into stocks.  To some degree, this is a positive underpinning of why the market ran up but has not yet had a significant correction.

Investor Sentiment has trended higher and remains so today. 

Certainly, an important indicator of what investors think about investing (and the stock market) shows up in the weekly Investor Sentiment readings.  These readings are from the AAII, the American Association of Individual Investors and have tracked closely with historical performance in the markets.

The reading from this week continues to show an increasing positive bias from individual investors. See charts below:

This indicator declined slightly this past week.  See chart below:


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Historically, here is what the AAII Bull-Bear Spreads looks like and why we have reason to be in the positive/optimistic camp:

Please remember, as we noted last week, new bull markets don’t go up in a straight line.  In fact, they all saw corrections along the way.  See chart below:

Thanks for tuning in. If you would like more information about our lineup of Investment Strategies and Portfolio Blends, please contact Rob Quinn our Chief Strategy Consultant at  [email protected]. Or if you want assistance managing your assets through our asset management affiliate company (MGAM) using a blend of our investment strategies, please reach out to Ben Scheibe at [email protected].

Now here is additional information from BIG VIEW put together by Keith and his team.

 

 

Risk-On

  • Despite a relatively negative week for equities, Risk Gauges actually improved back to fully risk-on. (+)
  • The Volatility Ratio (VIX/VXV) got oversold and has actually improved on a short-term basis. (+)
  • Cash Volatility ($VIX.X) actually weakened this week alongside equities, a bullish indication. (+)
  • Oil (USO) is the one major outlier in the market this week as it continues to close at new highs for the year. (+)

Risk-Off

  • Volume patterns have collapsed for all 4 key US indices, with more distribution days than accumulation days for every major index over the past 2 weeks. (-)
  • In a continuation of last week’s trend, sector rotation shows that spec sectors like Technology (XLK) and Semiconductors (SMH) were the weakest sectors while Energy (XLE) continues to surge powered by Oil (USO). (-)
  • The McClellan Oscillator is definitely in bearish territory but potentially looking a bit oversold for both the S&P 500 (SPY) and Nasdaq Composite ($COMPX). (-)
  • The New High / New Low ratio for both the S&P 500 and the Nasdaq Composite appear to have rolled over. (-)
  • On the longer end of the yield curve markets have broken down, and after a short-term mean reversion bounce TLT is now flirting with recent lows. (-)
  • Value (VTV) held up rather well relative to Growth stocks (VUG) which closed under their 50-day moving average and in a warning phase. (-)
  • Emerging Markets (EEM) have now followed more established foreign equities (EFA) into a warning phase, with both now underperforming relative to US Equities according to TriplePlay. (-)

Neutral

  • 3 out of the 4 key US indices closed down on the week, but all remain in a bullish phase with the exception of Nasdaq (QQQ) which closed in a warning phase. (=)
  • The Nasdaq (QQQ) has reached oversold levels on both price and momentum according to RealMotion, and may be finding support on the new 6-month calendar range low which could make it subject to mean reversion. (=)
  • Energy (XLE) in general was clearly the strongest sector this week thanks to the likes of Oil (US) and Oil Exploration (OIH), which contrasts the continued push for renewable energy sources with Solar (TAN) down over the past two weeks. (=)
  • Vietnam (VNM), a discretionary holding for MarketGauge, has now taken leadership as it is up nearly 27% over the past 6 months. (=)
  • The number of stocks within the S&P 500 that are above their short-term moving average bounced this week and looks to have the potential for a further recovery next week. (=)
  • Semiconductors (SMH) are the most under-pressure member of Mish’s Modern Family but are deeply oversold on both price and momentum according to RealMotion. SMH could potentially find support at the 200-day moving average on RealMotion. (=)
  • Soft Commodities (DBA) and Copper (COPX) both broke down this week and closed beneath their respective 50-day moving averages. (=)

There is no Big View video this week.

If you’d like access to Big View Premium, please contact Rob Quinn our Chief Strategy Consultant at  [email protected]. Or if you want assistance managing your assets through our asset management affiliate company (MGAM) using a blend of our investment strategies, please reach out to Ben Scheibe at [email protected].

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