Broker Check

While Bulls and Bears Battle, Data Shows the Score

| February 13, 2023

Bond and equities markets are in a much better place so far this year than throughout 2022. We’re seeing more evidence of inflation slowing and it’s providing a launching point for bulls to run.

Aside from the recent unexpectedly strong labor market reports, data on manufacturing, factory orders, housing, retail, and productivity are all trending lower. The latter are all in line with the Federal Reserve’s directive to soften growth.

A couple weeks ago, the Fed raised the federal funds rate by 25 basis points. Currently, there is a more than 82% probability for another quarter-point hike next month:

Our readers know we would prefer for the Fed to pause and evaluate the effects of its rate hiking efforts so far. Unfortunately, that may not happen as there’s a possibility of another hike in May. If that occurs, it will bring the federal funds rate perhaps as high as 5.25%.

The reason for more rate increases is the Fed is fixated on the labor market now since the unemployment rate fell to 3.4%. This solidifies the notion that the Fed will keep hiking rates a couple more times and maintain higher rates for longer. Such sentiment is evident from Fed Chair Jerome Powell’s comments a couple weeks ago:

As our readers know, the key metric that doesn't get enough attention is the M2 measure of money supply. It is now showing negative growth. That means there is less money for banks to lend out. This data point remains something to watch closely.

That said, there appears to be some investor FOMO (fear of missing out) reappearing in markets. It seems the economy is strong enough to handle a federal funds rate of 5% or more, which has triggered a shift in sentiment that is pulling money off the sidelines and into equities.

Additionally, the bond market still isn't biting on some of the Fed’s commentary. Rather, it’s still signaling that the Fed will pivot later this year and lower interest rates a bit:

More historical bullishness is also reflected in the Dow Jones Transportation Average (DJTA), which has broken out to a six-month high as of this writing (see chart below). According to Dow Theory, which forecasts an upward market trend if a Dow average advances past previous important highs as another Dow average does the same, leadership by the transports is bullish and hardly the stuff of recessions.

While there is bearish data out there, many data points show how the bulls are winning their ever-present and ongoing battle with bears. For example, the computer chip and chip equipment sectors (i.e., semiconductors) are breaking out higher. Recently the VanEck Semiconductor ETF (SMH), which invests in U.S. semiconductor firms, broke through its 200-day moving average like a hot knife through butter:

So, here’s the bottom line: in the last four weeks alone, global equity funds have taken in more than $44.7 billion, according to EPFR Global data. This supports the stock market rally that’s taken place for most of 2023 so far.

Hopefully it’s clear from all this data that there are two distinct camps pushing and pulling markets. They’re the familiar forces we all know – the optimistic bulls and the pessimistic bears. And their recent tussles show how emotions (always) play a significant role in stock market behavior.

You may think that’s not necessarily a good thing. But the market needs emotional participants. It can’t function without them. Remember, every time a sell order is filled, there’s a buyer on the other end. There’s a decent chance one (or both) of those investors is making an emotional decision and both believe they are right.

But even with all this emotion at play, it's clear buyers are in control. We once again turn to the trusty Big Money Index (BMI) from our friends at MAPsignals. Remember, the BMI is a 25-day moving average of “big money” investor activity. It is hovering around overbought levels (80% or more), indicating professional investors are buying a lot:

While the emotional news headlines may not reflect it, there is monster “big money” buying happening. In fact, it’s the most buying since June 2020. The action so far this year has been overwhelmingly on the buy side:

“Big money” investors are smart professionals. They may not get it right every time (nobody does), but they definitely know what they’re doing. And right now, they’re buying in bulk. What are they buying? As this MAPsignals sector rankings table shows, they’re buying everything, especially growth-friendly discretionary and technology stocks:

To provide a final bit of bullish evidence that the bulls are winning so far, look at the MAPsignals breakdown of “big money” buys and sells by market capitalization:

Most of the buying has been in small- and mid-cap stocks. That reflects an appetite for cyclical value, meaning “big money” investors see bargains in smaller firms and companies whose stocks have been beaten down. They’re scooping up cheap stocks of smaller discretionary, technology, materials, and industrials companies (i.e., building blocks of future growth). The sectors being bought indicate the market is betting on recovery throughout the rest of the year.

Still, stocks may pull back in the near future in order to consolidate. Overbought territory, which can last a while, indicates the market is running hot. When that occurs, normal corrections tend to follow. So, February could be bumpier than January (remember, markets ebb and flow).

And while we expect some consolidation to relieve the market’s overbought technical condition, keep in mind that such action is constructive. It sets investors up for further gains the rest of the year, as long as the fundamentals continue to hold up – it’s always about the fundamentals.

*Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC.  Cornerstone Financial and CoreCap are separate and unaffiliated entities.