Resilient market hasn’t reversed, yet also hasn’t broken out

What a resilient market!  Even with evidence of Treasuries starting to selloff again, markets have been able to push higher.  Stocks have been higher over the first six of nine trading days in 2023, led by Communication Services, Discretionary, Materials, and a strong comeback this past week in Technology. 

Evidence of breakouts in Small and micro-caps is certainly encouraging for the intermediate-term case, and breadth has picked up steadily, not just in the short run but also intermediate-term breadth.  However, despite all this bullishness, prices do now lie near the 200-day moving average(m.a.) in SPX, and as seen below, lie directly up against this weekly Ichimoku Cloud resistance. 

Long-term downtrends from last January have not been surpassed, yet there hasn’t been any evidence of markets starting to turn down thus far this week, even following Thursday’s CPI report.  While this doesn’t’ mean it’s not going to happen, it also doesn’t mean one can simply turn sights towards the moon, in absence of more Technology strength and longer-term trend breakouts. 

As of Thursday’s close 1/12, there were 83% of all SPX issues above their 20-day moving average.  That certainly sounds exciting.  However, every peak in the last year coincided with this gauge being just over 85% before turning down, notably in November, August, May, March, and January 2022.

Importantly perhaps for the Bulls, ETF’s like QQQ-1.87%  have just confirmed Weekly TD Sequential Countdown 13 “buys” for the first time since making similar but reciprocal “Sell” signals at the peak in November 2021.  Yet these haven’t been confirmed yet on AAPL, MSFT, nor GOOGL, and daily charts are within three days of upside exhaustion.

Finally, Treasury yields do seem to be bottoming in the short run.  While many are now firmly convinced yields can’t go higher, this same skepticism was seen near the peaks as to firmly believing yields could not drop in October.

I remain of the opinion that US markets are nearing a short-term peak as part of a gradual broadening out in the market that should lead stocks higher this year.  However, barring any evidence of price turning down under lows of the prior day on a closing basis, this certainly has not yet happened.  Furthermore, the price action in Russell 2k argues for another few days of gains before this reaches any type of resistance.

Overall, I’ll believe it when I see it.   This goes for both upside breakouts, or evidence of trend reversals, neither one which has occurred on the major benchmark indices.  Given that cycles project lower into late January, it would be interesting if these did not work as planned. 

Furthermore, any ability to push up above 4100 in SPX would be seen as quite positive for the prospects of a continued rally.   This might cause the cycle to invert where prices actually peak when they’re supposed to bottom.

Regardless, it’s just worth pointing out that markets are indeed resilient and seem to be following the 1^st quarter Pre-election year playbook.  It’s also worth pointing out that this strength seems to be directly going against the narrative laid forth by many strategists who feel earnings should come further under pressure and expect a weak first half of 2023.

Overall, this week’s peak has not materialized.  Most DeMark counts point to another 2-3 days of strength, which given Monday’s holiday, points to mid-to-end of next week, not this week.  I’ll certainly stay focused on what’s happening in near-term price action.  At present, there are quite a few conflicting factors, but the resilience in the US Stock market, while lagging Europe and China, is certainly eye-opening and likely points to a much better stock market in 2023.

Growth still looks disappointing vs. Value

Charts are bearish for Large, Medium and Small-cap Growth vs. Value.  All three styles have witnessed long-term breakdowns in Growth vs Value in the last two months. 

Interestingly enough, the decline in Treasury yields has had little to no positive effects on most growth stocks in recent weeks. 

While I’m optimistic that Growth should begin a comeback at some point in the 2^nd half of 2023, there hasn’t been enough evidence of even minor stabilization to think that happens right away. 

Now, yields look to be trying to bottom out in the near-term.  While the pullback in yields hasn’t positively affected Technology as much as many would have liked to see, I suspect that a bounce in Yields could still prove to be negative to markets in the next few weeks.

Interestingly enough, counter-trend TD Sequential “13 Countdown Buys” were successfully confirmed today in QQQ on a weekly basis.  However, these are still distant in stocks like GOOGL and have not been confirmed in AAPL, nor MSFT, which are obvious big weightings.

Energy should continue to drive outperformance in Value, and I suspect that Energy outperformance and Tech underperformance keeps a lid on Growth for the time being barring an even larger breakdown in Treasury yields.  At present, some kind of bounce seems more likely.

This weekly chart below highlights the Ratio of iShares Russell 1000 Growth over Russell 1000 Value (IWF-1.56%  vs. IWD0.61% )   All three styles have nosedived since last August.

Breadth thrust might seem impressive, but these tend to be better at lows than highs

Much has been made of the recent broad-based expansion Equities have shown in recent weeks since bottoming in late December.

Indeed, the movement in Small-caps, Microcaps and many sectors such as Consumer Discretionary, Industrials, Materials, Communication Services, and Financials has been impressive even despite a more lackluster bounce in the indices.

However, when measuring the 10-day breadth thrust of Advance/Decline, we see that on a weekly basis, we’re not yet at levels which have proven overly impressive, in rising above 2.0 on this chart, which normally is key for both upside and downside.

Furthermore, the downward signals in breadth, like what were seen in Summer 2022, Spring 2020, 2018 and 2016 tend to be more actionable as buys for when Advance/Decline gets too compressed on the downside, vs. times when it seems to make sharp upward movement.

As can be seen below, some of the times markets showed extreme upside breadth, it did seem to lead higher, such as early 2019 or 2021.  However, other times, it coincided with peaks, such as August 2021. 

Thus, I find these signals to be rather difficult to trust in forming opinions when upside breadth expansion happens.  Part of this is because an extreme signal normally coincides with short-term overbought conditions which then require consolidation. 

Thus, many of the short-term “bullish” signals are directly followed by short-term selloffs.  At any rate, until the larger downtrend in Advance/Decline (A/D) shows a breakout, and that goes for A/D, along with benchmark indices, and key stocks like AAPL, and MSFT, it’s just difficult putting too much stock in positive breadth in the short run.

Credit Card stocks should be an area of focus within Financials

Despite the bank stocks shrugging off early losses and reversing course Friday, neither the Commercial nor regional banks seem to be the best area to position in within the Financial space.

Investment banks and Trusts have shown far better performance off the October lows than the broader banking group.  Furthermore, Regional banks have suffered lately as rates have pulled back sharply into 2023.

Credit card issuers like Visa V-0.88%  and Mastercard, MA-0.23% , however, have strengthened dramatically, which might not be a surprise given the rapid uptick in credit card balances that many consumers are holding in recent months.   Furthermore, the period of Covid-19 coincided with a sharp contraction in the amount of cash that most investors use for transactions vs debit and credit cards.

Seeing this weekly chart below, the technical price action lately in Visa directly lines up with this view that credit card companies might have a more prosperous year.

Both V-0.88%  and MA-0.23%  have broken out above intermediate-term downtrends in recent weeks which suggests both should have an upward bias in 2023 for movement back to highs.  While this might take some time, this particular sub-set within Financials looks quite bullish technically, and should be overweighted.

Technically speaking, Visa’s breakout of intermediate-term trendline resistance should allow this to trend up towards $233 in the months ahead, with eventual targets at $252.  Furthermore, one should consider areas at $210-$215 to be attractive support.