We investors might think we’re in the story “Alexander and the Terrible, Horrible, No Good, Very Bad Day,” where nothing goes right. Gloom from the anticipated recession is casting a long shadow (even though the market has already priced in a recession, whether it occurs or not).
It’s good to step back in such times. Perspective can shift. Having done that, we think the market is close to pulling out of its malaise, even if it may not feel that way.
CEOs tend to agree. Many earnings calls feature top bosses talking about demand durability. That said, the excitement is contained to just their individual firms, not the economy as a whole.
It’s not stopping some investors from embracing risk as the S&P 500* continues to rise. But the reality UP UNTIL NOW is that unless you hold a handful of stocks propping up the market, you probably feel as if you are not doing too well.
The one bright spot this year is last year’s rotten apple – technology stocks. They had mostly suffered since November 2021 through the end of 2022. Investors who sold tech then because they didn’t want to ride the wave now want back in.
We can see the market is chopping along, yet still rising as it creates “higher lows”, as MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor buys versus sells, has fallen until recently:
While macro index gains look good on the surface, the latest jumps are almost exclusively due to tech stock resilience. The Technology Select Sector SPDR Fund (XLK), an exchange-traded fund (ETF) that tracks the S&P 500 technology sector, has been on fire (green bars signify “big money” buying, red bars show “big money” selling):
Up until now, almost every other sector has looked the opposite.
Let’s dive deeper by looking at the four main stock market indexes:
At first glance, DIA and IWM are struggling sideways:
Meanwhile, SPY and QQQ are on better footing due to their heavier tech makeups:
Only 40% of the S&P 500’s constituents are profitable this year. Just 14.7% of the index’s stocks are tech stocks by number, but they make up 35% of the index by weight.
Of the profitable stocks, 25% of them are tech firms, which have returned an average of 27% so far this year, per FactSet. Additionally, as you’ll see below, roughly 25% of the S&P 500’s weighting is in 10 stocks, and the average return of those is 63%. For the top five S&P 500 stocks, the average return is 83% this year.
So, why not jump exclusively into tech stocks?
Maybe that's a great option. But as Ed Seykota, who’s considered the father of modern systems trading, said, “The trend is your friend until the end where bends.” This tech trend will bend or break sooner or later, which is why diversification is key.
A Broadening Market
We're beginning to see evidence of a broadening market, which we think is constructive for the rest of the year. Here’s a snapshot:
- Even after 2023’s heavy lifting, technology stocks remain strong.
- Trades are expanding – unloved tech names are seeing inflows.
- The small-cap focused Russell 2000 surged 6% so far this month.
- Regional bank stocks are recovering.
- Industrials are emerging as an area of strength – up 4% so far this month.
There are technical trend developments worth mentioning too.
For instance, the S&P 500 jumped back over the 4,200 level:
As you can see in the chart above, there appears to be little resistance ahead of August 2022’s peak near 4,325.
Next, the equal-weighted S&P 500 broke out from its downtrend:
If this momentum continues, the broader market can begin to play catch up and better resemble current market leaders.
Third, the tech trade is spreading, as evidenced by an equal-weighted S&P 500 technology index breaking out to its highest levels recently:
This action supports the claim that the rally is beginning to spread outside just a handful of huge tech stocks.
Another example of widening strength is the Russell 2000 which has broken out to its highest level in more than two months:
This suggests small-cap stocks are beginning to gain ground on larger equities.
Knowing this (along with the S&P 500’s multi-month highs), there’s a case for bullishness later in 2023 and early in 2024 – as we’ve been saying. The “trusty” (overpaid) strategists are now beginning to catch up, raising their targets as they climb over each other in a frenzy:
If these moves continue, our focus will shift to three keys over the next month that could prove significant to our thesis:
- The May 2023 consumer price index (CPI) release on June 13 – as of this writing, expected core CPI increases (0.4% month-over-month, 5.5% year-over-year) should invoke a pause in interest rate hikes.
- Will the Federal Reserve tolerate the recent easing of financial conditions and rise in FAANG or make more overbearing mistakes?
- Will stock leadership continue broadening? As of this writing, eight of the 11 S&P 500 industrial sectors are trading at greater than their 20-day daily moving averages.
If it isn’t clear yet, contrary to the “bear-istas” who serve cups of hot “haterade” daily, market breadth seems to be expanding, which we view as positive. Tech did the work early in the year. Now it looks like the rest of the S&P 500 is responding to falling inflation, potentially easing of financial conditions, and overall improving market dynamics.
*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
#Cornerstone Financial Services, LLC owns SPY, QQQ, and IWM directly in managed client accounts.
^Cornerstone Financial Services, LLC owns AAPL, MSFT, NVDA, GOOGL, META, AVGO, CSCO, AMD, and ACN directly in managed client accounts. Daniel Milan owns AAPL, MSFT and AMD personally.
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