February 11, 2024
Weekly Market Outlook
By Donn Goodman
The stock market and the good old American pastime of watching football are thriving this weekend. New all-time highs on the S&P 500 each of these past few weeks is driving investor sentiment readings much higher.
We are glad you are with us for this week’s Market Outlook. We hope that you have had a profitable week and will enjoy the weekend. If you are an avid football fan (or Taylor Swift fan) you are probably enthusiastic about watching the big game. For me, I enjoy the brand new and usually funny commercials. I look forward to tuning in to watch the emerging trends that will drive consumers for the next few months. With 200 million Americans watching the big game, it is no surprise that they get an incredible amount of $ for just 30 seconds of air time.
Speaking of the Super Bowl, since it is happening later today, here are some fun facts that you may or may not be aware of:
The Super Bowl Indicator and the Stock Market.
The Super Bowl (SB) indicator is a nonscientific barometer of the stock market suggesting that the outcome of the Super Bowl could somehow predict the stock market’s direction for the coming year.
However, the idea behind this indicator was tied to the fact that a SB win by the NFL team from the American Football Conference (AFC) will predict a decline (bear market) in the coming year. A win for the team from the National Football Conference (NFC), on the other hand, predicts a rise in the market or a bull run in the upcoming year.
How did this come about (you might ask)?
Leonard Koppett, a sportswriter for the New York Times, first introduced the Super Bowl indicator in 1978. Up until that point, the indicator had never been wrong. At one point in time, the indicator boasted a more than 90% success rate in predicting the up-or-down outcome of the S&P 500 before the dotcom years (1998-2001).
Through 2023, the indicator has been correct 41 out of 57 times for a 72% accuracy. However, over the past twenty years (2004-2023), it has only been correct six times or 30%.
Conclusion: As a means of predicting the stock market, the Super Bowl indicator is completely irrelevant. There is absolutely no reason to believe that the winner of a football game could in any way dictate the performance of the stock market.
What teams have most dominated the 58 Super Bowls? See chart below:
You may notice that my hometown of Cleveland is not represented even once in the above chart. Oh well, as they say here, “there is always next year”. (On Friday, we did win Best Defensive Player of the Year, Coach of the Year, Defensive Coach of the Year, and Comeback Player of the Year…so we have that going for us!)
Let’s talk about the really important things now, NEW HIGHS on the S&P 500 index.
Yesterday, the S&P 500 index finished above 5,000 for the first time. We have written several times in recent Market Outlook columns (click here for last week’s column) that the stock market (and individual stocks) like round numbers. They are pulled both up (and down in bad markets) to hit round numbers. It is no surprise that the S&P was “pulled” up to 5,000 and beyond. As we have pointed out in the past few weeks, we had expected it.
Just as important, the S&P 500 is up 14 of the past 15 weeks, which has not been done since 1972. See charts below:
Investors continue to bet on a “soft landing” and a resilient US economy given low unemployment, inflation having come down over the past year and the Federal Reserve’s forecast of several rate cuts during 2024. A positive recent takeaway is that FOOD prices are beginning to come down. This should help ease the burden of the average family having difficulties providing quality food for their families, something we often hear from consumers and surveys about “what is worrying the average worker.” See chart below:
The good news for the economy is that wages have been rising and that shows up in the following chart illustrating that the average consumer keeps spending $:
Despite the 5,000-point milestone, there’s caution that the S&P 500’s 20% rally since early November may hit a roadblock soon. (more on this in a minute).
The Fed kept its main interest rate at a 22-year high for a fourth straight meeting last week, and while officials signaled their openness to cutting them eventually, it won’t happen right away.
“The big driver for the rally is the realization that the US economy is unlikely to falter in the way that the average prognosticator had expected,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “A better economy, healthy profits, and lower inflation are providing the fuel.”
Continued strength in the S&P 500 is making history.
Additional facts and figures on the S&P 500: (more on several of these shortly)
First Impressions Matter. In the 40 years since WWII when the S&P 500 was up at least 1.5% in January, its median performance for the remainder of the year was a gain of 13.4% with positive returns 82.5% of the time. In all other years, the S&P 500's median gain was 5.7% with positive returns 66.7% of the time. (Source: Bespoke)
Lights Out. The Technology sector’s weighting in the S&P 500 ticked above 30% on 1/24 for the first time since 9/26/00. On the same day, the Utilities sector saw its weighting in the S&P 500 drop to a multi-decade low of 2.17%. Since 1990, the only time the Utilities sector’s weighting dipped below that level was in late March 2000 at the peak of the Dot Com Bubble. (Source: Bloomberg)
Does Share Price Matter? In the large-cap Russell 1,000, the 100 stocks that began 2024 with the lowest share prices fell an average of 7.4% in January, while the 100 stocks with the highest share prices rose an average of 2.0%. Additionally, the 41 Russell 1,000 stocks that began the year with a $500+ share price rose 3.2% in January, while the 25 sub-$10 stocks fell 11.0%. (Source: Bespoke)
No Breaks. The S&P 500 has now rallied 21.3% over the last 70 trading days without experiencing even a 2% decline from a closing high. Since 1953, there have been 15 other streaks where the index went at least 70 trading days without a 2% decline. One year after those prior 70 trading day periods, the S&P 500 was up an average of 12.7% with gains 87% of the time. (Source: Bespoke)
Earnings Beats are Rallying. 72% of the more than 500 companies that had reported Q4 2023 earnings through February 7th reported stronger than expected EPS compared to a historical EPS “beat” rate of 65% over the last ten years. Stocks that beat EPS estimates have rallied more than 2% on the first trading day following their earnings reports this season, or about 50 basis points more than normal. (Source: Bespoke)
The takeaway: The current rally is beginning to challenge historical extremes, but as the legendary technician Paul Montgomery once said, “The most bullish thing the market can do is go up.”
What happens next?
What areas of the Stock Market are driving the rally?
It would be no surprise to any investor that the rally since last October has been dominated by mega cap stocks, especially in two areas, Technology and Communication Services.
We want to take a few moments to explore what this means and if it can continue. We really have NO IDEA if it can or will continue. However, many of the current valuation metrics have not been this high or this over bought since the Dot Com bubble in 2000-2002.
The current large cap heat map. The following chart shows you the S&P 500 sectors based on their strength of stocks over their 50/100/200 day moving averages. We will then address the two strongest sectors, Technology and Communication Services.
Technology.
This sector is dominated by the world’s largest (and most cash flush) companies like Apple, Nvidia, Microsoft, Salesforce, Oracle and many others at or above the $1 trillion mark. Because the index is cap weighted these stocks are heavily influencing the S&P 500 index. Let’s look at just how influential Technology stocks have been the past five years in the chart below:
Look at the below chart going back to the 2000-2002 sector low and the incredible climb to new highs this year.
It might be a surprise to learn that Nvidia, one of the best performing stocks the past few years due to its direct contribution to the AI craze, is now one of the world’s largest companies. See below:
Here are the Technology Leaders over the last 4 weeks:
Communication Services.
Right there with Technology leading the current Market Party (especially the last 13 months) is the Communication Services sector which includes mega cap stocks Meta, Google, Netflix and a host of others. See the chart below:
The Communication Services stocks that have been the best performers for the past 4 weeks are listed below. Given that media is included (like News Corp), the following list represents some stocks that may not be on your radar. See chart below:
The Magnificent 7:
This iconic group – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla – racked up an average gain of 111% last year... more than four times the overall market's return.
These stocks pushed markets higher. And that led to a rare setup... A vast majority of stocks underperformed the overall index. See chart below:
The Magnificent Seven had an incredible year in 2023. They drove the major indexes higher on promises of innovation. And in the end, they were responsible for most of the market's return.
That's what makes last year's bull market so strange: While the overall market had a great year, the majority of stocks actually underperformed...
Technology and Communication Services are getting expensive.
It’s no secret that tech has been in the driver’s seat. But interestingly tech (in this case TMT i.e. Technology, Media, Telecommunications) *excluding mag 7* is the most expensive it has been this cycle.
Introducing a remarkable improvement to an existing MarketGauge strategy that might surprise you.
We have been sharing with our subscribers, partners and valuable asset management clients that we will soon be blessed with the presence of greatness. Dr. Alan Friedman, a current Professor of Data Sciences at Purdue University has been working on projects with us over the past year. Beginning early summer, he will be with us in an expanded capacity as he is retiring from teaching at Purdue.
A Graduate of Harvard in biosciences, Dr Friedman is well versed in practical application from academia and is at the top of his game. Over the past year we have had him exploring our existing strategies to find more optimal ways to blend them (soon to be offered through MarketGauge Pro) and he looked to see where/how some of our individual strategies could be improved upon.
We are about to roll out a new and improved NASDAQ All Star strategy that will be NQ 3. We have been trading the NASDAQ All Stars as a 5-stock portfolio with rotation on the beginning of the month. What Dr. Friedman unfolded for us is that by trading just 3 NASDAQ stocks on a different day of the month and evaluating which stocks should be in the portfolio on an even different day, we could greatly improve the risk-return parameters and offer our subscribers and asset management clients an even better strategy. (NASDAQ All Stars has historically beaten the NASDAQ 100 by a wide margin). Here is the results from his work as compared to the incredible 100% NASDAQ outperformance of the S&P as was noted above.
If you would like more information, please reach out to Rob Quinn at [email protected] and he can discuss with you the timing of our rolling this strategy out.
Areas of Concern
One current market negative is the wide divergence between large caps and small cap stocks.
Small and midcap stocks have not been participating in the recent rally causing some concern among market technicians. Currently, we are on a precipice. Friday’s action was positive for small caps (IWM) and we now see their action as a break higher or breakdown scenario. We put together a chart showing the sideways movement of the small cap index. While Friday was a positive potential “breakout” it needs further confirmation. See chart below:
The takeaway: The Russell 2000 (IWM) led by a wide margin Friday despite its abysmal performance this year. After coiling into a tight range over the past nine weeks, the Small Cap index - IWM is primed for a large move or trend in either direction.
We like Small Cap stocks. Even though Small & Midcap stock were the big underperformers last year, our Small & Midcap Earnings Growth strategy was up 55% last year. All you had to do to have that performance yourself was follow our signals. Reach out to [email protected] if you want more information about that strategy.
Factors that are supportive of Small Cap potential outperformance going forward include the following:
The following chart further identifies several valuation metrics that contribute to the positive Small Cap story going forward (provided by Banc of America):
“It's not what you buy, it's what you pay. Success in investing doesn't come from buying good things but from buying things well. If you don't know the difference, you're in the wrong business.” - Howard Marks
Large Cap stocks may be vulnerable. As noted above, this has been a lengthy rally without a normal breather or correction. See chart below:
As most of you know, our indicators remain positive, and we are fully invested in our tactical allocation strategies.
We are seeing signs that we could be in for a pullback. Greed is climbing and some of the valuation metrics provided by Banc of America below, show that while the markets are firmly in the BULLISH camp, some of the indicators are getting in the “caution” zone.
Other charts we have introduced to you previously (and will be in our MarketGauge Pro website soon) are the Color charts. We have 12 of these in total (3 for Dow, 3 for NYSE, 3 for NDX and 3 for the S&P 500).
I wanted to share with you just two of these. They are the longer term NDX and SPY which is showing that breadth is starting to breakdown. The following charts show the # of stocks above their 200-day mov averages (in the future we will be also providing the # of stocks above the 20 and 50-day which are shorter term). See charts below:
Suggestion: On assets you may be managing that don’t follow our investment strategies, we urge you to be vigilant in applying risk management. To us, this means taking off profits that are outsized (or paring back) as well as placing stops where applicable.
Additionally, you might consider placing “hedges” on the portfolio. This equates to buying puts or purchasing inverse ETFs to protect your portfolio. We have been around long enough to know that the market can grind higher as it has done these past 15 weeks, but because of the large profits investors are sitting with, the market can go down much more quickly. Be careful.
Thank you for reading today. Again, hope that you have a very enjoyable rest of your Sunday. I now turn it over to Keith and his team to explore the important bullets that may go further into areas of the market that appear attractive or need additional caution.
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