So Many Blessings Even with Rough Financial Markets

November 20, 2022

Weekly Market Outlook

By Keith Schneider and Donn Goodman


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Dear Gaugers, from our families to yours, everyone at MarketGauge (and related companies) wishes you and your families a happy, healthy, and grateful Thanksgiving holiday.

Even with a rough year in the financial markets and hot inflation, there is still so much for us all to be thankful for. What might be the 3 things that come to your mind when you go around the table, and everyone asks, “what are you most grateful for this year.”

One of those things for us (here at MG) is being of service to you, our subscribers, readers, investors, friends, and public, who we wish to help educate and guide to better investment/financial decisions.

There aren’t many investors (including the largest hedge funds) that are net positive this year. This week it was reported on Fox Business that the average retirement fund is down 23% year-to-date (YTD). This is consistent with most of the financial universe reporting.

While some of our long-term investment strategies are down on the year, our blended strategies are outperforming the markets by a wide margin because several strategies are positive YTD.

Our performance is a result of the time and effort we put into testing, re-testing, developing enhancements, and rolling out new investment strategies to create smoother, better, and risk-averse investment outcomes. Markets have changed, new asset classes have emerged and submerged, and one must adapt.

Decades of experience and the current bear market have demonstrated that combining multiple, disparate, non-correlated investment strategies is the best way to achieve an optimal outcome. Last week we demonstrated the returns and peace of mind you can enjoy with blended strategies in a webinar entitled How To Create Your All Weather Portfolio

A blended strategy is an investment method you can do yourself, or (we recently released) several options to have it 100% done for you by an asset manager. If you’d like to learn more, watch the webinar mentioned above or contact Rob here.

So Many Different Opinions About Where the Market May Be Headed

We had a Zoom interaction with our All-Access members this week. (email rob@marketgauge.com or book a call with him if you’re interested in becoming an All-Access Member). Geoff took a poll to see measure the group’s investment sentiment. The question was, “Do you think we get up to 4400 on the S&P or back down to recent lows first?” The idea of the poll was to see if one side was lopsided, which of course, would point to a contrarian viewpoint. (The majority are often wrong). Such was not the case. It was evenly split.

This divide in opinions is what we are finding with investment research and publishing companies as well right now. I receive a few subscriptions myself. I also connect with many friends and colleagues weekly who like to share their viewpoints.

I can assure you, our readers, that the opinions I read and receive from others are all over the place right now. And as well as our small, exclusive survey of All-Access members, they were about evenly split.

So, who do we believe? How do we go about investing (regardless of any consensus opinion)?

The answer is really quite simple (at least we think so). Find someone who has a reputable track record and has been successful, especially in down markets, and stick with just a couple. Blending different investment strategies, similar to what we are now rolling out, is an optimal way to spread your investment thesis. We feel particularly strongly about the potential for commodities and metals right now. In fact, we believe we may be at the start of a commodity super cycle.

Our algorithms are also telling us that these areas are gaining strength. We are encouraged that our dynamic rules-based and trend-adapting strategies are uncovering early opportunities that most financial media has not yet identified (examples this year were ERX, UNG, TBT and TAN).

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Was There a Good Reason for This Most Recent Market Rally?

There have been a few productive reasons that the market snapped back from its downtrend in September and began to act more positively in October. There is always a catalyst.

The real impetus behind the rapid move up in the stock markets (DIA, SPY, IWM & QQQ) was due to these inputs (ranked in order of importance as we see it):

  1. Earnings held up. Not as bad as some expected. According to FactSet, 94% of S&P 500 companies have reported their Q3 2022 results with 69% beating their earnings estimates and 71% reporting revenues above estimates.
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  2. Investor Sentiment improved (see chart below). This may also have been caused by seasonality factors. We covered this in detail last week.

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  1. Inflation cooling. The most recent numbers indicate that inflation is beginning to decline. After hitting a peak this summer of a year-over-year (YoY) annual rate of 9.0%, the rate of inflation declined with October’s reading to 7.7%

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Oil prices have fallen rather steeply. After sitting well above $100 a barrel for most of the year, we have seen a dramatic fall. See chart below:

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Also, shipping rates are in a nosedive. However, caution is advised as these numbers (especially food and labor costs) are extremely high, and inflation is still at least 5-6% above the Fed’s target. See chart below.

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  1. Interest rates declining in the past month. After rising straight up for most of the fall, interest rates backed off. This has allowed investors to recalculate their earnings expectation x P/E margins to push stock prices higher. See chart below:

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  1. The dollar declined. Magazine covers showing the non-stop $ (see below) are always a good contrarian indicator. Reporters typically call the tops and bottoms of many assets. The US Dollar hitting new highs prompted many such articles. The Dollar, especially against the Japanese Yen and Euro, has had a swift correction. Don’t bet on this slide continuing given the hawkish rhetoric from the Fed just this past week.

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Can It, Will It Continue?

Who knows? Seasonality factors, increased investor sentiment, new money inflows to stocks and institutional managers getting more bullish can keep the markets going in a positive trend for longer than many expect. Read about the seasonality effects in the Market Outlook from last week here.

However, our risk gauges and some of our Algo’s are suggesting that we may be on the brink of another pullback or correction. We have not seen the kind of momentum recently that we would like or expect. Some of the technical indicators are wobbly. We highly suggest that you continue to heed caution.

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Chop, chop and more chop. 

You may have noticed that we are churning about this week. Last Thursday marked the first 5-day period all year that the S&P did not have a move of 1% up or down in a given 5-day period. Friday was a calm day given that this year has wide swings in the S&P 500 on more Fridays than any year since 1938. See graph below:

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We do know this. Many of our investment strategies work well in the chop. Why? Because there is always a bull market somewhere (2022 was a huge Energy bull market), and our reactive (and adaptive) rules-based strategies rotate quickly and can enter a position before a trend unfolds. (Check out the new GEMS strategy in the replay of last week’s webinar. The GEMS strategy is a combination of Global Macro and Sector Moderate with some enhanced rules).

While all investors welcome a month or more rally (October-November), we caution you yet again that we have seen this movie before this year. We say this not to be a downer but to instill caution and prudence into your investment thesis. Please review the two slides below, which show the pattern of the S&P 500 during 2022. It bears repeating as a potential warning:

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This past week, Utilities (XLU) and Consumer Staples (XLC) were the new leaders in the game of sector rotation. (See Big View below). These are defensive areas of the market and typically do well as a proxy for fixed income and in a higher dividend-oriented investment thesis. Their good performance took our risk gauges from green to neutral to ending the week in the red. This is a caution light for you to consider.

Once again, we reiterate that there is always a bull market somewhere and using a blend of multiple strategies that exploit different edges is the key to successful investing/trading. To find out more about our newest blends please contact Rob Quinn.

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Here are some additional important observations captured from our Big View service
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Risk On

  • Volume Analysis has drastically improved over the past two weeks, with almost no distribution days in any major indices and accumulation days for SPY and IWM on Friday. (+)
  • The short-term Volatility ratio remains positive after digesting a bit to start the week. (+)

Neutral

  • Last week the market became overbought before going sideways to modestly up this week, forming a short-term compression range across the indices. Follow the next directional move closely next week. (=)
  • The market is in need of clarity, with Solar (TAN) up for the week and Clean Energy (PBW) down, indicating no clear short-term trends. (=)
  • This week, the McClellan Oscillator failed to confirm new highs and can be interpreted as ambiguous or a neutral reading for the SPY and Nasdaq Composite. (=)
  • Value stocks (VTV) continue to hold up better than Growth (VUG) on a relative basis but were head-to-head this week. (=)
  • The only member of Mish’s Modern Family that continues to show technical strength and in a bull phase is Biotechnology (IBB). (=)
  • Foreign Equities (EEM & EFA) continued to lead compared to US equities. (=)
  • Oil (USO) came off significantly this week, crossing below the 50-day moving average and looking like it could test long-term lows in the coming weeks. (=)

Risk Off

  • Although it had been one of the strongest indices over the past few weeks, IWM closed this week back below the 200-day moving average showing signs of weakness. (-)
  • While the market was marginally down on the week, the leading sectors were all Risk-off plays like Utilities (XLU) and Consumer Staples (XLP). (-)
  • The New High / New Low ratio remains intact and bullish for the SPY, but the Nasdaq Composite is showing signs of stress and is on the cusp of failing. (-)
  • Risk Gauges have retreated to Risk-Off. (-)
  • The number of stocks above key moving averages gives a short-term sell signal for IWM and SPY. (-)
  • Interest rates are holding up despite being back down this week, especially after becoming overbought last week. (=)
  • The Yield Curve continues to invert further. (-)
  • The US Dollar (UUP) is oversold and in the process of mean reverting, which is a short-term bearish indication. (-)

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Again, we wish you a joyful, relaxing, enjoyable Thanksgiving!!!


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