Wall Street Week: Consumers Hold The 'Key' (NYSEARCA:SPY) - Seeking Alpha
Wall Street Week: Consumers Hold The 'Key' (NYSEARCA:SPY) | Seeking Alpha
Wall Street Week: Consumers Hold The 'Key'
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USVM 14 Comments
Summary
- The Fed raises rates again, but unless inflation reverses higher, the Fed is a non-event.
- The Rhetoric says "soft-landing", while the Data says recession.
- Retail sales are resilient, but are showing signs of slowing.
- Analysts' earnings estimates are about to meet a decelerating economy.
- This idea was discussed in more depth with members of my private investing community, The Savvy Investor. Learn More »
Giselleflissak/E+ via Getty Images
Quick decipherment is very important to avoid the systematic errors which invariably arise from prolonged reflection."
-
Jean Francois Champollion
For all the time, talent, and treasure, that has been spent trying to separate the noise from what's important, most investors still have difficulty understanding the riddles of the equity market. The opening quote seems to be telling me that it doesn't pay to try and overanalyze the markets. That does dovetail with the "follow the trend" and "avoid the noise" mantra that in reality is one of the best strategies available to all investors. What I like about it - One doesn't need a Ph.D. to pull that off. It does require discipline in controlling emotion and that is always a "work in progress".
Just when it seems as though things can't go right for the market, performance starts to improve. Likewise, just when things seemingly can't go wrong, things have a way of popping up out of the blue. To say that sentiment turned more bullish during this rally would be an understatement. However, that is what drives shore term moves in the equity market.
Inflation data has improved, but we are now about to enter a period where the "comps" are going to get tougher. This earnings season has started positively, but there are still many companies left to report. From a seasonal perspective, we just exited what has historically been one of the best periods for equities.
There are still plenty of reasons to be optimistic about the second half of the year, but the remainder of this summer may provide some challenges and probably won't be the "easy ride" we just experienced. Healthy BULL markets have a way of keeping investors from getting too optimistic, so there will be shakeouts along the way. Just as getting too carried away by the negative side is the wrong move, getting overly optimistic about the market based on this rally isn't the smart move either.
Inflation And The Fed Take A Backseat
The historical evidence we've seen regarding interest rates and market rallies makes it pretty clear that what we have witnessed in '23 isn't that unusual. That being said, I think it's about time we wrap up the continuing conversations over what the Fed is or isn't going to do as the year winds down. It's obvious Powell and associates are at the end of the rate hiking cycle. It should also be obvious that unless the economy falls off a cliff next month (Low probability) the Fed funds rate is going to remain at these levels for a while.
Bottom line; while the media will keep the Fed in the spotlight (that's noise), their actions should be immaterial to the equity market for the remainder of the year. That aligns with the fact that every market participant is well aware that inflation is coming down. So while the inflation rate is not at target levels (2%) it's fair to say the Fed doesn't have to press the issue in the next few months.
CPI/Feds Funds (www.factset.com)
We now see Core CPI below the Fed Funds rate. So it is a LOW probability that upcoming economic data will change the outcome from the Fed. In essence, it will be a "wait-and-see" mode now. More reason to believe the Fed is a non-event going forward and more importantly, ALL of this has already been priced into equities.
Only the "pie in the sky" crowd that has called for rate "cuts" since the first quarter will be surprised over what comes next for the Fed. The labor market's resilience has been one of the biggest thorns on the side of the Fed throughout its tightening campaign. However, the labor market is becoming more balanced and some cracks are beginning to show. If the labor market continues to soften as many economists expect, consumer spending should also start to fade.
There are already anecdotal signs that a consumer slowdown is underway. First, the shift from spending on goods to spending on experiences has been a big driver of growth over the last eighteen months. However, since it's on an unsustainable trajectory, that trend will also slow as we turn the page next year.
Combining that with early reports from research firms suggests the slowdown can gain traction. The Redbook Index, which tracks spending over 9,000 general merchandise stores, has turned negative on a year-over-year basis for the first time since September 2020.
Sales (www.redbookresearch.com/8702.html)
And finally, a back-to-school spending survey conducted by Deloitte, estimates that spending will likely fall around 10% this year-its first decline in nine years.
School Sales (www2.deloitte.com/us/en.html)
However, when we dig into the details we find some interesting facts regarding spending. There is a large difference in spending between the generations. We have a stark difference between wealth levels across generations, and we know who controls the bulk of the money. Specifically, older generations hold a lot more wealth than younger generations, allowing them to better weather rising living costs, and that supports what we are about to discuss. According to the Federal Reserve, Baby Boomers held $73 trillion in net worth as of 4Q 2022, eight times that of Millennials. On a per-household basis, Traditionalist and Baby Boomer families had on average $1.4 million and $1.7 million in wealth, respectively, compared with just $214k for Millennial households. So it's no surprise the Baby Boomers (born 1946-64) and Traditionalist households (1928-45) are showing higher YoY growth rates in card spending according to Bank of America internal data.
These combined groups' faster spending is to some extent holding up the average aggregate.
Spending (www.business.bofa.com/content/boaml/en_us/home.html)
It is also striking that Gen X, which is made up of people born between 1965 and 1977, is showing the same weaker trends as Millennials and Gen Z. So that explains the Redbook and back-to-school reports. This also demonstrates how inflation has cut into the spending patterns of the average working household. Another factor, Bank of America data shows that Gen Z and Millennials are seeing a much higher rise in median rent and mortgage payments than older generations. Since consumer spending accounts for nearly two-thirds of economic growth, this has a material impact on the MACRO scene.
Economists and analysts have been scratching their heads wondering why inflation hasn't dampened spending, and the answer is provided in the data that we just saw. It would appear the older generation has been supporting this resiliency in spending. Now we'll just have to see how far the boomers can keep consumer spending robust. In turn, keeping the economy afloat.
Earnings Season Always Matters, But this season is ultra important.
Analyst Consensus For "Second-Half" Acceleration - Meets Economic Deceleration.
All eyes are on earnings season. During the last year or so we've highlighted the two major hurdles in the MACRO scene that the equity markets had to deal with. First, inflation needs to be perceived to be coming back down to 2%. Barring a supply shock across the economy, it feels as if we are getting there fast, and I already eluded that we can move this along with the Fed to the background for a while. However, while the perception of lower inflation will drive positive sentiment, I leave this as an OPEN item. It will be months before we can officially call this inflation cycle over.
On the earnings front, many analysts are looking for a big rebound in the second half of the year. The next several weeks will add more insight to this story. As the year progresses the "inflation is solved" exuberance might morph into concerns over forward earnings estimates questioning whether they are realistic.
The Week On Wall Street
All of the Major indices rallied to start the trading week, but in general, the gains were fairly muted. The DJIA extended its winning streak to 11, as investors watched the rally broaden out to include sectors that were laggards in the first half of the year.
The Dow 30 made it 12, then 13 daily gains in a row as the entire equity market continued to remain resilient in the face of earnings and the FOMC meeting. The 13-day gain has resulted in the DJIA taking on ~5.2%.
The party hats were out on Thursday morning as investors were ready to celebrate 14 straight days of gains in the DJIA. However, an intraday reversal took the wind out of the sails of this melt-up market. At the end of the day, all of the indices gave up earlier gains and closed with a loss. The "excuse du jour" for the selloff was the large upside move in Treasuries during the trading session. The 10-year Treasury closed at 4% while the 2 Year Treasury ended the day at 4.93%.
This wildly extended equity market doesn't need an "excuse" to drop. It's been overbought for a LONG time so Thursday's price action was no surprise. However, the "pause" lasted 24 hours. Once the early morning Friday "futures" indicated there would be no follow-through weakness on Friday, it was back to rally mode. The DJIA rallied for its 14th gain out of the last 15 trading days closing the week with a modest gain. The other indices continued their upward momentum as well leaving the NASDAQ and the S&P on track for their 5th straight monthly gain.
The Economy
The 2.4% Q2 U.S. GDP growth pace beat estimates thanks to a wide array of upside "real" surprises that partly reflected weak price assumptions and big downside surprises for both inventories and imports that might reflect "slow and go" disruptions at U.S. ports. Inventories added just $5.8 B to Q2 GDP growth, while net exports added $2.9 B. Analysts saw solid growth rates of 1.6% for consumption, 7.7% for business fixed investment, and 2.36% for government purchases. Residential construction bucked the updraft with a 4.2% Q2 drop to leave a 9th consecutive decline.
The GDP report feeds into the 'soft landing' narrative.
U.S. personal income rose 0.3% in June with spending up 0.5 %. The former is softer and the latter is stronger than forecasts. The PCE deflator was up 0.2% on the month after the prior 0.1% gain. The 12-month pace decelerated to 3.0% y/y from 3.8% y/y. It was as high as 7.0% in June 2022. The core PCE deflator also rose 0.2% following the prior 0.3% increase. The annual rate slid to 4.1% y/y from 4.6% y/y. It has fallen from the 5.4% y/y pace from February 2022 which was the hottest since 1983. Real personal spending climbed 0.4% from 0.1% and is the strongest since January.
Manufacturing
The Chicago National Activity index dipped 0.04 ticks to -0.32 in June after dropping 0.41 points to -0.28 in May. This negative headline print reflects below-trend growth and softening in inflation. The report indicated that 54 of the 85 components that make up the index made negative contributions, while 31 made positive contributions.
US PMI data remains 'soft'
Composite Output Index at 52.0 (June: 53.2). 5-month low.
Services Business Activity Index(2) at 52.4 (June: 54.4). 5-month low.
Manufacturing Output Index(4) at 50.2 (June: 46.9). 2-month high.
Manufacturing PMI (3) at 49.0 (June: 46.3). 3-month high.
The drop in the Richmond Fed index to -9 in July from -8 left the measure still above the 3-year low of -14. Today's July Richmond Fed drop joins a decline for the Empire State but a gain for the Philly Fed to leave a mix that is consistent with the assumption that the full set of headline and component sentiment measures will oscillate around slightly contractionary levels through Q3 and Q4.
Richmond Fed (www.richmondfed.org/)
With the third of five regional manufacturing indices released by Federal Reserve banks around the country updated yesterday, we've got a firmer picture of how factories are feeling about the economy in July.
Fed regional indices (www.bespokepremium.com)
Perhaps we have marked a bottom, and the manufacturing sector can show some stabilization.
A remaining concern is Capex. The index has plunged from record highs to the lowest non-recession levels on record (though it has bounced somewhat in recent months).
CAPEX (www.bespokepremium.com)
An indication there is still plenty of uncertainty about where the economy is headed.
Housing
New home sales undershot estimates with a 2.5% June drop to a 697k pace after 74k in revisions that left May sales at what is still a 15-month high of 715k. The median price slipped to $415,400 in June. Prices remain well above the pre-pandemic all-time high of just $343,400 in November of 2017. Home inventories rose to 432k, leaving this gauge still well below the 13-year high of 466k in October, while the months' supply of homes rose to 7.4 from a 14-month low of 7.2 in May.
The weaker-than-assumed new home sales and median price data reflect what is still a remarkably limited hit to the sector from elevated mortgage rates that have disqualified many buyers. Sales are supported by the climb in new home completions from the housing starts report to a 16-year high in February, before a small ensuing pullback.
Pending home sales bounced 0.3% to 76.8 in June after falling 2.5% to 76.6 in May. Today's increase breaks a string of three straight monthly declines. However, the index is off of the year's high of 83.2 from February. The index was at 98.3 a year ago. This is another piece of good news on the economy and the beleaguered housing sector that has been hit hard by affordability issues, rising mortgage rates, and limited supply.
Consumer
Consumer confidence surged 6.9 points to 117.7 in July, much stronger than projected, after spiking 7.6 points to 110.1 in June. This is the highest since July 2021. Both components improved. While this could be the start of a rebound off the lows, confidence levels have a long road before they get close to pre-pandemic levels.
In March 2020, congress paused payments and interest accrual on student loans for seven months to help borrowers who may have lost jobs early in the pandemic. The forbearance was repeatedly extended for some 40 million borrowers even though their finances generally improved with Covid transfer payments.
Many borrowers used their monthly student loan savings to increase spending. Now they are about to face a situation where they must make payments again. According to TransUnion Credit, many borrowers also took out additional debt. They estimate 53% of consumers with student loans increased bank credit card debt, 36% took out new auto loans, and 15% added mortgages and unsecured personal loans. The idea was as long as they didn't have to repay their student loans, they could afford to make payments on other debt. TransUnion notes;
Borrowers will experience a payment shock as they attempt to recalibrate their monthly budgets to accommodate this new payment. About a quarter of student loan borrowers have monthly payments that exceed $400, and 6.6% will be required to pay more than $1,000 a month starting in October."
Student loan forbearance has already cost taxpayers more than $200 billion, and lenders may now have to pay for it too. This may turn out to be a rather large double whammy for the economy and a select community of consumers.
The FED
Markets were pricing a 97% chance of a hike, and the Fed didn't disappoint. Rates were increased by 25 basis points and that made it eleven rate increases since March '22. Fed Funds futures imply that was the last hike of the cycle. If this truly is the end of the hikes, it would close the book on what has been one of the steepest tightening paths in history.
I haven't been aligned with the Fed Funds Futures market since they started to predict rate cuts this year, and I continue to disagree with the assumptions. In my view that market is completely out of touch with reality. The Fed did NOT declare this "THE END". In essence, the Fed's stance remains unchanged. They remain "data dependent", and will decide the future path of interest rates on a meeting-by-meeting basis.
The Fed critics remain quite vocal in their opposition to the policy. I continue to wonder what Economists, Analysts, and Investors believe the Fed was going to do when inflation hit 9% in March of '22. Perhaps we can agree they were late to the scene, but the results to date are hardly terrible.
Inflation has come down from 9% to ~3 % in the last 15 months. Thankfully this did NOT turn out to be a cycle where inflation stays at very elevated levels for a very long period. It was called "transitory", but if one is critical and wanted inflation to recede in a month then according to them this cycle has not been "transitionary". The problem with economists and analysts - they expect results in a week.
If this wasn't transitory inflation, we would see inflation at a much higher rate today, and it would be locked into place. That is not the case today. It's safe to say the last part of this road to 2% could be a long grind. The continuing obsession and commentary on whether this is the last rate hike is absurd. The LAST thing the Fed wants to do is declare inflation DEAD, only to have it make a comeback. The critics today would then have a field day criticizing Fed policy.
HIGH inflation that is embedded in the economy will destroy the economy much more than rate hikes, and it destroys the people that can afford it least, - the low and middle-income classes. For some reason that is not being factored into the conversation. Rest assured the Fed is willing to do just about anything to AVOID that situation.
Finally, let's go back to why the Fed had to enter the scene in the first place. That's another fact that is now conveniently forgotten by the analyst community. The Fed was put in a box. The outsized and mostly unnecessary fiscal stimulus at the end of the covid event is the reason the economy is in this position. The warnings were there -- inflation destroys the economy, and those warnings went unheeded. Congress then piled on more stimulus.
Spending that had little to do with covid relief, and as we now see, is nothing BUT inflationary. Spending programs and handouts are all obstacles that are speedbumps in the Fed's inflation fight and might wind up being the difference in getting to the 2% target in a timely fashion.
While economists and analysts still obsess over the fed's policy, one thing I am very confident in. Unless the economy crumbles overnight, interest rates won't be cut. Instead, they will stay at these levels or higher well into 2024.
The Global Economy
The IMF lifted the global growth forecast to 3%, from the 2.8% expected in April. The latest update of the bank's world economic outlook left the forecast for 2024 unchanged at 2.8%. Global inflation is expected to decline to 6.8% this year and 5.2% in 2024, with core seen falling more gradually. U.S. growth is expected at 1.8% this year, falling to 1.0% in 2024. In contrast, the IMF expects Eurozone growth to slow to 0.9% this year, before accelerating to 1.5% in 2024. The U.K. economy is expected to expand just 0.4% this year.
While the United States and India saw their economic projections revised modestly upward, the International Monetary Fund maintains its expectations on China, saying its 'recovery could slow'.
The "post covid" recovery in China has been extremely disappointing, and China just unveiled new initiatives to revive its ailing business activity. They have identified a series of industries and key state projects now open to private investment. The National Development and Reform Commission said the sectors included transport, water, clean energy, new infrastructure, advanced manufacturing, and modern mechanized agriculture.
PMI Data
Advance purchasing manager index data for July was released overnight with almost every manufacturing and services reading missing estimates.
Global PMI (www.bespokepremium.com)
Composite Output Index at 50.7 (Jun: 52.8). 6-month low.
Services PMI Business Activity Index at 51.5 (Jun: 53.7). 6-month low.
Manufacturing Output Index(3) at 46.5 (Jun: 48.1). 7-month low.
Manufacturing PMI(4) at 45.0 (Jun: 46.5). 38-month low
Composite PMI Output Index at 48.9 (June: 49.9). 8-month low.
Services PMI Business Activity Index at 51.1 (June: 52.0). 6-month low.
Manufacturing PMI Output Index at 42.9 (June: 44.2). 38-month low.
Manufacturing PMI at 42.7 (June: 43.4). 38-month low.
Composite Output Index, July: 52.1 (June Final: 52.1)
Services Business Activity Index, July: 53.9 (June Final: 54.0)
Manufacturing Output Index, July: 48.4 (June Final: 48.1)
Earnings
As of mid-week, 75% of S&P 500 companies had beaten earnings estimates and 61% had beaten revenue estimates with 18% of companies having reported (per FactSet). While such beat percentages appear impressive, we must always remember the caveat that a lowered bar heading into earnings frequently results in such a large amount of beats.
The 75% earnings beat number is slightly below the 5-year average of 77% and the 61% revenue number is well below the 69% 5-year average. Moreover, the S&P 500 is on pace to see a 9% y/y earnings decline for the second quarter, a reminder that we remain within an "earnings recession" if not an economic recession.
These backward-looking numbers matter little if the future is expected to get better, so it will be important to monitor how companies guide the market concerning future earnings and revenues and how investors respond.
The Daily Chart of the S&P 500 ( SPY)
The S&P stumbled on Thursday but quickly resumed the 'melt-up' scene that has dominated trading lately.
S&P 500 (www.tc2000.com)
A chart that shows why buying on a breakout usually pays off. Since that event, the uptrend has not been disturbed, and this week's new recovery high keeps the march to 4600 going.
Investment Backdrop
The DJIA ran its winning streak to 13 days this week, which is the longest since 2017 and just the sixth streak of as long or longer of duration since WWII. It's natural to now think a pullback is overdue to even things out, and some giveback isn't out of the question. One thing worth pointing out, though, is that following each of these five prior eleven-plus day winning streaks, the Dow was higher three and six months later all five times. So while the short-term can be weaker than what we have just witnessed, the intermediate and longer-term trends can remain intact.
The strength in the senior index is another example of the market broadening out. In addition, we are also witnessing a Bifurcated market scene that I expect to continue for a while and perhaps get more pronounced. Remember it's not that unusual for indices to diverge. During the BEAR market scene, Tech was wrecked (-33%) while the DJIA went sideways for most of '22, and wound up losing 8%. Therefore I can see a sector like Technology losing steam while the DJIA rallies. Over the years I've seen plenty of historical precedents to confirm these divergencies.
The Q3 strategy called for the laggards to pick up the baton and so far, so good. Energy and Financials are stronger. On the Energy side, all sub-sectors are rallying led by Oil Services ( IEZ) which posted a new all-time high this week. Now the "Explorers" ( XOP) are joining in. I advise using weakness to get involved in these stocks.
I also expect Healthcare ( XLV) to start attracting money. This is the time to accumulate. A "Good" market tends to broaden out and that is what we are seeing lately.
Small Caps
The resistance level, that I've discussed since this latest rally in small caps began has once agon turned back the Russell 2000 ( IWM). There is support just below current levels and perhaps the index can get re-energized after a quick pullback. However, if initial support doesn't hold then it's back to the trading range and a big disappointment for the BULLS.
Growth vs. Value
Mega caps have driven most of the gains in the market this year, and it's been discussed endlessly over the last seven months. What people seem to forget, though, is how much these stocks underperformed the market in 2022.
As we moved forward the theme for Q3 was to look for the laggards to start getting some attention. I'm getting the feeling that some of the "old economy" stocks are going to get back into the game.
"Value at a reasonable price" - I added two "industrials" with 5+% yields and an Oil service company that is also a solid "value" situation. All can be classified as total return situations. An opportunity for appreciation and income.
That doesn't mean I am shunning tech. My strategy calls for buying select tech on dips and that is exactly why I added to one of my high-quality tech position during the week. It's been a good month for SAVVY investors as the trades in the last 2 months have uncovered 7 double-digit winners, highlighted by individual gains of 49%, 24%, 19%, and 17%.
Sectors
Commodities
When the most recent inflation numbers came out and were once again benign, I saw quite a few people state emphatically that "inflation" is dead. Only time will tell on that front, but so-called "inflation hedges" such as Gold and Silver have been acting quite perky lately. With all the attention on the stock market, too, I have been watching the metals closely for signs of a potential low being struck. With the impressive move recently, I think there's now enough in place to at least take some chances on the metals again on pullbacks as long as the recent lows hold.
A late-week rally pushed Gold ( GLD), Silver, ( SLV), and Uranium ( URA) to weekly gains.
The GOLD ETF ( GLD) had quietly put together a 5-week winning streak. broken. That was a needed rebound, stopping the decline and now GLD is back above all short-term trend lines. Gold BULLS are celebrating because this rally turns a decline into what could now be at worst a sideways trading pattern.
SILVER ( SLV) remains resilient holding on to most of the gains off the recent lows. I'm a buyer on any pullback, as I await another chance to add a trading position. These trading profits are a big positive, as they in effect lower the cost basis on the CORE position.
URANIUM ( URA) has rallied nicely but is having trouble getting thru a minor resistance level. I've got a small (5.5%) quick positive trade going in URA as well and may decide to ring the register on the next pop higher.
All of the metals are in long-term bull trends. As long as they remain that way. I plan to hold CORE positions in all three.
Crude OIL
After an unsuccessful attempt mid-month, crude oil prices have regained momentum, and just last week the price of WTI crude oil did something it hasn't been able to do since late last August; namely, to close above a key technical level. Despite the recent bounce in prices, WTI is still down about 3% on the year and well off its highs from earlier last year.
Bespoke Investment Group;
Following prior streaks where crude oil closed below its 200-Day MA for more than 200 trading days, forward returns for the commodity once the streak was broken were generally positive. Three and six months later, WTI's median performance was greater than 10% with gains three out of four times, and one year later, it was higher all four times with gains in the range of 15.5% up to 56.9%."
While this could be good news for energy BULLS, it may toss some cold water on the general market as higher energy costs keep inflation around.
Energy Stocks
We've seen a nice trading range develop in the Energy ETF ( XLE). Support has been held multiple times since March, and this last push higher left the ETF at resistance. IF Energy is going to "get back in the game", we will need to see the March /April highs taken out as a first step. In the meantime, the long-term BULL trend line has held and we could see more sideways action before a potential liftoff.
In addition to Energy ETF ( XLE) coming to life in Q3, the oil services sub-sector ( IEZ) has been a clear leader in July. The ETF ran right into what looks like a tough resistance area. I highlighted the Oil Services group to members of my service and we have been rewarded with a 15% gain in July.
Probabilities suggest that the group may settle back before re-energizing for a push higher. Any pullback in the ETF or Individual Oil service stocks are BUYING opportunities.
So who's been buying the Energy sector lately?
I'm not into conspiracies, BUT with the pushback on ESG gaining momentum, I smell money managers removing their leashes, taking off their handcuffs, and adding energy exposure. The former Czar of ESG, Larry Fink, and his BlackRock army of ESG managers sent a shockwave to the ESG movement this past week. Blackrock announced that the CEO of Saudi Aramco would become a member of the firm's Board of Directors.
"His leadership experience, understanding of the global energy industry and the drivers of the shift towards a low carbon economy, as well as his knowledge of the Middle East region, will all contribute meaningfully to the BlackRock Board dialogue," Fink added.
This move would have been unheard of a year or so ago. With ESG mandates, it's been taboo to invest in the fossil fuel industry. Blackrock's embracing of the Aramco CEO sends a clear message that it is not a crime to invest in the sector.
Of course, energy investors will need to see the price of crude oil stabilize and eventually inch higher, and now that the Saudis are back in control, they can make that happen.
Natural Gas
Crude Oil has put together a quiet rally recently. I thought Natural Gas ( UNG) had a similar setup but it's been more back-and-forth trading recently. For a while, it appeared the ETF was headed back down to lows before a mine rally emerged sending UNG back above all short-term trend lines.
UNG was hanging on to support by a thread and is now trading in the $7- $7.25 range. For the moment, the BEAR to BULL reversal pattern is still viable.
Financials
Financials ( XLF) are another interesting group. Given the trouble in the bank stocks during the first quarter, the sector has fallen way out of favor among most investors. Even this group, though, has started to see an expansion in the percentage of stocks hitting 52-week highs and just recently saw the highest percentage in a single day in at least the last 12 months.
Not only has the sector seen more of its components hitting new highs, but it has also routinely closed at its highest levels since March 9th (when SIVB started to implode) over the last two weeks. The ETF is now moved slightly above its longer-term trend lines indicating it might be ready to get involved in the next leg of the rally. It is another group that could be beneficiaries of the slow rotation out of Tech.
Healthcare
HealthCare rallied on the back of good EPS reports from the group. The ETF ( XLV) has lagged the market this year and I remain confident that is going to change. We've seen a trading range all year and a recent rally has the group UP and out of that range. I plan to use this earnings season to pick up more exposure. If the economy is truly going to weaken or be a slow-growing situation, Healthcare will outperform.
Biotech
The BEAR to BULL reversal pattern continues with a sideways basing pattern. I've seen moves that looked like breakdowns and rallies that appeared to be breakouts. There are no guarantees, but probabilities suggest this situation resolves to the upside. If that is the case the ensuing BULL market in this group could be explosive.
Technology
In general, Mega Cap Tech earnings reports have not disappointed. Post Earnings price action has depended on the performance of the individual stock entering this month. Microsoft ( MSFT) has pulled back ~6% while stocks like Alphabet ( GOOG) and Meta Platforms ( META) are at new recovery highs. Selectivity remains paramount.
Semiconductors Sub-Sector
A breakout, then a test of support, and now another leg higher. The rally above the resistance line on the DAILY chart was a signal that has produced a new still looks promising, as the recent dip to that breakout zone is holding. Even if the Semiconductor ETF ( SOXX) falters here, near-term support is a mere 5.5% from Friday's closing price. Another example of why I expect pullbacks to be well-contained.
Bitcoin
When it comes to animal spirits, the two biggest cryptos (Bitcoin and Ethereum) tend to be a good barometer of overall sentiment. Starting with bitcoin, the world's largest crypto has been trading in a tight range lately, and over the last three weeks, the spread between its intraday high and low has been less than 7.5%.
Bespoke Investment Group;
Dating back to 2017 when bitcoin's price first breached the $1,000 level, there have only been three other periods where the three-week range was less than 7.5%, and while performance was mixed in the short-term, these tight ranges were followed by gains over the next year, ranging from 38% in 2018 (including an initial 47% drop) immediately after the tight range to a gain of 245% after the 2020 period. The most recent narrow range before the current one was this past January, and already Bitcoin is up over 80%."
Regarding their current charts, both Bitcoin and Ethereum have been trading in steady uptrends since late 2022. Now, after a short-term period of sideways consolidation, both started to show signs of moving out of those ranges to the upside.
I recently opened a trading position in the Grayscale Bitcoin Trust ETF ( OTC:GBTC) to try and capture any upside rally.
Final Thoughts
If you haven't noticed, the Market's Mindset has changed.
Remember the discussion we had last year as Technology was being destroyed right before our eyes? How much more can these stocks fall? This year it is just the opposite - How can these stocks rally so much?
Ladies and gentlemen, extremes are not uncommon in the investment world. They do of course challenge our strategies and tend to confuse us. Stocks will overreach on the downside and overextend on the upside.
So here we are with another fine line to walk now. Investors have to remain disciplined BUT with this strong trend as a tailwind, it's also important not to get shaken out of positions during minor dips. The "technical" viewpoint is more important than ever now. When we were in the BEAR market backdrop, a pullback to support had to be met with caution and questions. Revisit the opening line and remember, The Mindset has changed.
Pullbacks to support have to be viewed as a potential opportunity. Probabilities are HIGH that after a quick flush, any stock or ETF that has been in an uptrend will continue on that path. Investors should also realize that resuming that uptrend may take some time. However, as long as the primary trend in any situation that you are interested in stays positive, you have a tailwind to work with.
If an investor doesn't change with the market, they will be left behind.
THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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This article was written by
The Savvy Investor
INDEPENDENT Financial Adviser / Professional Investor- with over 35 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice, and Experience to produce Portfolios focused on achieving positive returns. Last year I launched my Marketplace Service, "The SAVVY Investor", and it's been well received with positive reviews. I've been part of the SA family since 2013 and correctly called the bull market for over 8+ years now.
MORE IMPORTANTLY, I recognized the change to the BEAR MARKET trend in February '22.
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