Which Way Are We Headed?
The Market’s Positive Signs

July 30, 2023

Weekly Market Outlook

By Donn Goodman and Keith Schneider


Good day Gaugers.  We all hope you are enjoying these warm summer months (in the US, maybe not where you are?).  Perhaps your own profitability from the stock market is helping you to enjoy this positive period even more.  We congratulate you if you are diligently following some of the MarketGauge investment strategies that are performing well and making your task of successful investing that much easier!

We are grateful and humbled by the many positive accolades we receive weekly.  Our mission is to not only create investment success for do-it-yourself folks, but now we have fully transitioned into being able to do it for you and assist you in managing your precious assets or retirement funds.

Our goal is to make it easy (and effortless) for you to execute our proprietary quant-driven investment methodologies for your long-term investment success.

What’s the Stock Market’s Next Move?

Fortunately, for the past few months, we have provided much more positive input in your investment game plan and have backed these constructs with countless charts and graphs.  In looking back, probably the charts from Ryan Detrick of Carson have been the most accurate and helpful as they showed what the market tends to do after being up 10% in the first few months.

Fear continues to dominate some of the financial publishing rhetoric.

I remain baffled and amazed at the large swath of writers who continue to offer a negative view even while the market makes new 52-week highs weekly.  Many of these prognosticators were correct in 2022, consistently warning that we were about to see a bear market.  They earned some credibility, and readers began to hang on to their every word. But many have been wrong in 2023!

The problem with their numerous negative theses is that the stock market (and earnings) tend to go up 70% of the time.  Additionally, as we have pointed out here, week after week, we are in a pre-election year.  The bias for the 3rd year of a Presidential term has been positive (since 1950 100% of the time).  See chart below (chart which I helped create from my old firm, Atalanta Sosnoff Capital)

The Signs Remain Positive

No matter how much fear the writers, talking heads and negative financial publishers say, the market continues to grind higher.  More importantly, the underlying health of the market has continued to improve these past few months.

Yes, we may see a much-needed consolidation or correction soon, but most of the signs suggest that it may be shallow.  Additionally, signs of a recession have not (yet) MATERIALIZED and while we may be pushing that off into some future moment (like 2024), this past week’s GDP of 2.4% growth handily beat the 2.0% expectations.   See chart below:

It is important to remember there is approximately $4 trillion in infrastructure, CHIPS, and anti-inflation bills were passed during 2021-20222and much of that money has not yet found its way into the economy.

No matter how much the Fed raises rates, how much Quantitative Tightening the Fed imposes, we are still awash in new monetary stimulus coming from the Federal Government.  Add to that, existing COVID money that remains in the economy, and you have the recipe for a continuing tight job market while consumers are still actively spending.  Retail and consumer spending are holding up some parts of the economy.

Here are other signs that the stock market is on solid footing: (thanks to LPL for producing great research this past week).

  1. Broadening participation. The narrow leadership (the magic 7 stocks) no longer holds true.  The Equal Weighted S&P 500 index (RSP) is now closing the gap:

  1. We went from bad breadth to good breadth.

The average stock in the S&P 500 is now trading above its 200-day moving average.  This is a sign that breadth has improved and is positive.  Should we go into a correction, it will take a lot to start knocking these stocks down when the breadth is so positive.  See each industry group below with a comparison of November 2022 to now (July 2023):

Below, we also provide a view of the S&P 500 index (all 500 stocks) above the 200-day and 50-day moving averages.  These charts continue to show a positive and expanding bias...  We consider the positive blue slope to be a guide to take a position of “risk-on”.

Charts for the S&P 500, DIA, NDX and the NYA will soon be available in the MarketGauge Pro offering an enhanced Big View Pro. 

# of Stocks in the S&P 500 above their 200-day moving average:

# of Stocks in the S&P 500 above their 50-day moving average:

There is little doubt that the number of stocks above these vital moving averages is getting a bit stretched or overdone (as compared to similar periods in the past).  A period of consolidation or even a correction may be helpful to take some of the “froth” out of the market.

  1. The Advance-Decline line remains positive and is showing good health for the markets as well.

The chart below shows the two-year cumulative advance-decline (A/D) line for the SPX.  The line is calculated by taking the difference between the number of advancing and declining stocks in the index for a given trading day and adding that difference to the prior day’s value.

A rising A/D line is indicative of positive market breadth (as shown above as well) as the number of advancing stocks is outpacing the declining stocks.

  1. Participation is Global.

The U.S. equity market is not the only place to find a bull market.  Global (including emerging markets) are also doing well, with several major indices recently hitting important new 52-week highs.  This includes the MSCI All Country World Index ex-USA.  This index is comprised of over 2,300 stocks (large and mid-cap companies) doing business in 22 of 23 developed markets AND 24 emerging market countries.  As shown below, the index recently broke out from a long triangle to hit a new 52-week high:

  1. Semiconductor stocks recently broke out as compared to corporate bonds.

The semiconductor industry is the lifeblood of the technology and AI revolution.  Mish likes to monitor “sister Semiconductor,” an important component of her Economic Modern Family, as one indication of the health of the economy and the markets.

Today, you can find these chips in just about everything manufactured, and therefore, they give an indication as to how well the products they are in are selling.  (Friday, Intel was up big on a recent earnings surprise, another welcome indicator for this technology and AI fueled rally).  See recent semiconductor vs. corporate bond chart below:

  1. Bullish investor sentiment is pulling new $ into the markets.

In this column for the past few weeks, we have discussed how investors are investing based on FOMO (Fear of Missing Out). These investors have been putting money in the stock market that had been sitting in money market funds.  Estimates are that money market funds are still awash with over $5 trillion parked on the sidelines that is not yet in the market.  (This could make the market rally much further especially if these investors really feel like they are “missing out”).

As mentioned above, fear is a powerful and negative influence.  Yet investor sentiment (as measured by the AAII-American Association of Individual Investors) remains bullish (positive)

Should we enter a correction later this summer, this could help buffer the downside. See both bullish and bearish investor sentiment charts below: (notice the high correlation of the S&P 500 performance to the Bullish/Bearish investor sentiment indicators).

Blowing Our Own Horn.

Let’s face it, if we don’t blow our horn, who will?

Our calls on the market have been spot on most of 2022.  Between this column and Mish’s daily (and her numerous national TV appearances which you can access here), we have interpreted the market internals and investor sentiment fairly accurately.  How is that possible?

We follow our own tools, and we watch BIG VIEW diligently for signs of overall market health. We also watch our own Risk Gauges in Alpha Rotation and they tell us a great amount about what is happening underneath the surface.

However, we are not prognosticators.  We have stated this fact consistently in previous Market Outlooks.

The truth is that we have no idea of the direction of the market (S&P 500) for the remainder of 2023.  Fortunately, we have very good tools that we have built to monitor the internals of the markets.

More importantly, we rely on these tools and avoid second-guessing what the inputs say.

MarketGauge has built sophisticated algorithms that are able to provide you with investment strategies that all employ diligent risk management controls.  Each of these strategies explore a different methodology (or, as Keith likes to call them, “edges”).  These formulaic strategies all take the guesswork out of a potentially complicated investment process.  Since these strategies are rules-based, no human emotional bias influences the investment strategy construct and actions dictated.  (Do you think we would have been capable of buying many stocks hitting new 52-week highs week after week?)

You ask how are these strategies doing?  We are happy to provide you with year-to-date performance numbers through Friday, July 28, 2023, as follows:

(These numbers do not include possible management fees if MGAM or another RIA is managing these strategies and do not include slippage which could negatively or positively affect the net returns). 

Additionally, you may not be aware that the long-term performance numbers as compared to their respective benchmarks (like S&P 500 or NASDAQ 100) are simply incredible.

Several of the above investment strategies were minimally negative in 2022, as were a couple that were slightly up or flat for the year.  This defeated the narrative that the financial industry put out that wanted you to believe that all investors got hurt during 2022.

More importantly, can you tell me what other financial publishers publish their own investment strategy report cards? Not many, if any.

If you find it difficult to execute the MarketGauge strategies or would like to explore how we can do it for you, please email me directly at [email protected] or Ben Scheibe at [email protected].

If you would like information on how to become a subscriber (what’s stopping you?), reach out to our Chief Strategy Officer (and generally very nice and helpful guy) Rob Quinn at [email protected].

We can also guide you on how best to use multiple strategies for optimal risk-reward construction.  What we have found is that using different investment strategies (with disparate methodologies) together creates a lower risk, smoother, and potentially higher probability of long-term investment success.   Our All-Weather Portfolio Blends are the simplest way to take advantage of the different “edges” utilizing different amounts of market exposure (sectors, capitalization, frequency of trading, etc.).

Now here is the rest of the story from Keith and his team from BIG VIEW:

 

Risk-On

  • All 4 key US indices are up on the week, with a new closing high in the S&P 500 (SPY). (+)
  • The S&P 500 regained its leadership relative to Utilities (XLU) and has improved the Risk Gauge back to Risk-On. (+)
  • Semiconductors (SMH) were strong and put in new highs while Utilities (XLU) sold off, a positive sign for sector rotation. (+)
  • Foreign Equities including China (FXI), Vietnam (VNM), and Africa (EZA) both significantly outperformed relative to US Equities this week. (+)
  • Risk Gauges have returned to fully Risk-On. (+)
  • The US 20-Year Treasury Bond (TLT) has gotten deeply oversold on both price and momentum according to Real Motion as it bounced at the end of the week from long-term support and even appears to have potentially put in a shorter timeframe double bottom. (+)
  • Even with the Fed raising short-term rates again, the Yield Curve inversion improved slightly. (+)
  • Growth stocks (VUG) are on the precipice of outperforming the US benchmark on a relative basis, while Value stocks (VTV) are equally as close to losing their leadership relative to the US market on a short-term basis. (+)
  • Mish’s Modern Family continues to improve with both Semiconductors (SMH) and Transportation (IYT) on fire and continuing to make new 2023 highs, while Regional Banks (KRE) also continue to recover steadily for the entire month of July after breaking out of an inverted head-and-shoulders bottom. (+)
  • Foreign Equities led by Emerging Markets (EEM) continue to lead relative to US Equities over the past few weeks. (+)
  • As we highlighted last week, US Oil (USO) looked strong and has gotten continued follow-through on its breakout this week. (+)

Risk-Off

  • Volume Patterns weakened for the key indices with the exception of the Diamonds (DIA) which is still showing 4 accumulation days compared to only 1 distribution day over the past 2 weeks. (-)
  • The 52-week new high/new low ratio looks toppy for the Nasdaq Composite. (-)

Neutral

  • The week ended with an inside day for all 4 key US indices on Friday. (=)
  • According to the number of stocks above key moving averages, the Russell 2000 (IWM) continues to improve while the S&P 500 deteriorated this week. (=)
  • Gold (GLD) is rolling over a bit in the short-term but it tested and bounced from its key 50-day moving average to end the week still in a bull phase. (=)


Stay One Step Ahead of The Markets and Profit
From The Current Volatility With Market Outlook

Keith Schneider

Every week you'll gain actionable insight with:

  • Unique analysis of themes driving the market trends, so you stay of the right side of the trends
  • Powerful inter-market analysis that reveals market turning points early
  • Big View charts and indicators that identify dangers and opportunities
  • Highlights of the most important economic trends, so you're on top of the news flow
Subscribe Now!
Donn Goodman