On a Winning Streak: Many Market Signs Appear More Bullish
Keith Schneider | Jul 24, 2023 02:40AM ET
This past week corporate earnings announcements picked up speed. You may recall that we mentioned the large money center Banks (JP Morgan, Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), etc.) had announced the week before. If you did not read last week’s issue, you may access it here.
Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) announced earnings on Wednesday that were perceived as a bit disappointing, even though Tesla beat on revenue and Netflix (because of cracking down on users sharing passwords) added over 5 million new subscribers (a huge number and greater than expected). The NASDAQ Composite was down over 2% on Thursday as a result of these mega Tech companies losing some ground. It was the worst day for the NASDAQ since March.
However, other large blue-chip businesses, such as IBM (NYSE:IBM) and Johnson & Johnson (NYSE:JNJ) reported earnings beats and the Dow Jones Industrial Average continued to move higher. More about that in a minute.
According to FactSet, 18% of S&P 500 companies have reported earnings. 75% have beaten earnings expectations with 61% also beating on revenue. This sounds good. However, please note that a) earnings expectations have been lowered this quarter; and b) usually 80% of S&P 500 companies beat their expectations. So far, the earnings beat is a little lighter than normal.
The market is priced for perfection and if the large companies miss their earnings expectations or, make a negative comment in their post earnings announcement conference calls, expect that the stocks will go down. Given how good the markets have been thus far in 2023, most of it will be profit taking at this point.
Be careful with your stocks that have upcoming earnings announcements.
Make sure that you are aware of upcoming earnings announcements as they relate to your portfolio holdings. If you have a profit in a particular stock and are worried about the potential for an earnings miss or possible disappointment, there are 3 things you can do. 1. Sell some of your holdings and take profits. 2) write some covered calls to bring in income and potentially lock in some of the stock’s profit, and 3) buy puts or even better buy a put spread which is buying a put and selling a put further away. These are all protective actions you can take to lock in some of your gains. If you own a stock that has not been behaving well, it may be broadcasting that its earnings are not expected to be good.
Another good week in the markets.
As we shared above, this past week the NASDAQ (QQQ) tripped up on Thursday and had an atypical 2023 negative week being down a little less than 1%. However, the S&P 500 (SPY) gained 0.65% and the Russell 2000 (IWM), with its smaller cap companies, was up 1.5% and the mighty DOW (DIA), with its mega cap blue chip companies, was up 2.0%
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The Winning Streak Continues.
You may not be aware, but Friday was a monumental day for the Dow. The Dow finished up positive (see below) and thrust it into the history books by having a WIN STREAK of 10 consecutive positive days.
There have not been many of these 10-day consecutive win streaks.
The Dow has been the big surprise this year. See the 18-month performance, which factors in the bear market of 2022:
This movement in the DOW and the S&P 500 being up almost 20% in 6+ months is quite meaningful. We provide some catalysts for this below.
We list some reasons below of what is driving the market’s recent positive action.
- The economy is holding up better than most analysts’ expectations, especially given the rapid rise in interest rates.
- Expectations of a recession have dropped considerably. This week, Goldman Sachs (NYSE:GS) reduced their expectations for a recession to 20-25%.
- Many analysts have increased their earnings estimates for companies.
- Many companies are now reporting that inflation has helped them increase their revenue (and profits) without increasing operating costs, as most analysts expected. Some of this is driven by them having an abundance of cash and buying back their stocks, which has mitigated the higher interest rate costs.
- Commodity costs have stayed flat. These “input” costs have not increased nearly as much as some expected.
- The consumer has stayed resilient. This is heavily tied to employment and labor force participation.
- Retail sales are staying positive. As long as the consumer is spending the economy has a chance to see a “soft” not “hard” landing.
- The expectation that the Federal Reserve may be at the end of their rate rising cycle. Even though most investors and analysts expect the Fed to raise rates by 0.25 bp next week.
- The 10-year is staying below 4.0% a threshold that starts to negatively impact stocks and attract $ away from stocks.
- Volatility is at the low end, indicating that right now there is little fear in the markets. (This can change quickly).
- Investors who have been on the sidelines are coming back into the market. They are putting money to work and much of it is in the biggest and best companies which further fuels the move higher in index funds.
- Investor Sentiment continues to climb.
- The S&P’s growth sectors are outperforming the value area of the market. Defensive areas like consumer staples and utilities are underperforming.
- Financial stocks have broken out of a sideways trend and are starting to push the markets higher.
Here are a few charts to illustrate some of the points above:
The Dollar is Declining. Good for Stocks:
Breadth is improving. This can be seen recently in the Advance/Decline line (# of stocks advancing minus the # of stocks declining) breaking out to new highs. See chart below:
The S&P versus XLP, the defensive Consumer Staples sector amplifies the reason that Growth Stocks continue to outperform Value stocks. See chart below:
The Volatility Index is showing low signs of fear. (FYI this could change at a moment’s notice)
Investing in Gold as a “fear hedge” to a possible market drawdown has not worked in 2023, even with a declining US Dollar. Here is a chart of Gold versus the S&P 500.
High Yield Bond spreads are at the lowest point in quite some time. This indicates that bankruptcy rates are either not being priced into the fixed income markets or that many investors have little reluctance to hold these higher yielding bonds, which often run in tandem with the equity markets:
Investor Sentiment (as measured by the AAII-American Association of Individual Investors) continue to improve. See chart below:
The longer-term trend of the S&P 500 is up. (also refer to last week’s Outlook to see the expanding number of S&P 500 stocks above their 50-day moving average): Here is a chart showing the price change of the S&P 500 and the ever-important 200-day moving average.
Further proof that the markets are poised for more gains:
Here is the Dow Theory Buy Signal in more detail:
And the beleaguered Regional Banking Index (remember Silicon Valley Bank and a few others going out of business?) is moving up and this is a big positive for the markets:
Additionally, our friend/associate Jeff Hugh CMT, points out in his Alpha Insight update this week that the equal weighted S&P 500 (the ETF that can be purchased is RSP) has taken a decidedly positive move to the upside. He provides additional insight in this chart. (see last week’s Outlook for more information on how to subscribe to Jeff and receive his powerful work).
The bigger question remains. What does the Dow’s impressive positive performance over 10 days have to do with future stock market returns?
As we have noted previously, we are not prognosticators, nor do we have a crystal ball. However, we do believe this rare 10-day move by the Dow Jones Industrial Average (along with the Dow Theory Buy signal) has the potential to surprise investors to the upside.
Here is a powerful chart showing on a “go forward basis” what the 10-day Dow win streaks means:
On Thursday, before the 10th day, there was another very impactful chart showing what a 9-day win streak for the Dow looks like. See chart below:
The “sell in May and go away” crowd is missing out.
If people abide by that wisdom or think that the summer months can bring a malaise to the investment markets, they are sorely wrong this year. That al wisdom has hurt investors in 2023.
The S&P 500 Index is up about 9% since May 1 and the tech-heavy NASDAQ Composite is up around 15% since then.
What Now?
Here we are, less than 20 months after a bear market began in 2022 as the Fed was ratcheting up its overnight Fed borrowing rates. We are a mere 260 points from the S&P completely erasing the start of the negative market of 2022. As shown above, chart patterns tracking everything from breadth, investor sentiment, the Dow Transportation index, defensive sectors and rising positive momentum all portray a picture of a healthy and positive stock market environment.
That said, not all the signals coming from the US economy are that rosy. And it appears that the Federal Reserve policy makers are only slightly less worried about inflation than they were at the beginning of this tightening cycle. Investors, however, do not appear worried as they just pushed stocks up for the eighth time in 10 weeks.
Here are a few other things that give us “pause” and suggest we not get too over exuberant.
- We are heading into what is typically a cautious period of the year. August – October tends to be a more volatile period. With stocks up as much as they are already, we suggest remaining careful and ever vigilant with your trading plan. Seasonally, the volatility index should begin to rise soon. See the chart below:
- Leading Economic Indicators are declining. This shows that the economy is losing momentum and growth is basically non-existent. See chart below:
- Bankruptcies recently have been increasing. Another negative indicator for the economy and worth noting. See chart below:
- The big firms have increased their S&P 500 targets since first reporting their forecasts back in January. These show estimates at or below where the market currently stands. This has to give investors a pause that the markets may correct to meet most of these expectations. See chart below:
Feeling Good.
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Utilizing formulaic, rules-based, quant investing has distinct advantages. We most often mitigate risk by reducing drawdowns and market volatility (especially with blends that expose different investment edges). An unemotional approach is designed to help investors “sleep well at night”.
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