March 2023 Upticks

Note: This Upticks report will be in replace of my Daily Technical Strategy piece today (3/31/2023).

Update

Happy Spring, and the Bull is Back??!! 1^st Quarter 2023 has come to a close with SPX having achieved the highest monthly close since last July! Technology has certainly been the standout in this regard and its outperformance has catapulted Tech to the top of the sector performance returns over the last one-week, one-month and 1^st quarter periods.  While the recent banking crisis has resulted in an exodus out of banking stocks, the US stock market has certainly proved to be far more resilient than most have given it credit for in recent weeks.  Now US markets finalize Q1 with a stellar comeback and enter the Second quarter in one of the best historical months for performance all year amidst a sea of ongoing pessimism.  While some eventual backing and filling might be necessary as markets near the historically bearish Pre-election month of May, it pays to keep an eye on not only sectors like Technology which have been working, but others like Healthcare and Energy, which are making a comeback.

As Q1 comes to a close, markets have seemingly shunned the uncertainty surrounding earnings declines or worries about the FOMC’s endgame for monetary tightening.  Furthermore, the threat of recession remains a very real possibility at some point in the future, in my view.  However, ongoing resilience in Technology stocks combined with some stabilization in the Banks looks to certainly have been a positive for US equity markets. Now the bounce is starting to gain credibility as breadth starts to show evidence of ratcheting up over the past week.

Technically speaking, markets certainly seem better as March has come to a close than they appeared at the end of February.  The strength over the last three of four weeks has successfully helped weekly momentum gauges like MACD turn back to positive territory.  Moreover, following a scary plunge into mid-March which took a brief toll on momentum and breadth, over 65% of stocks are now trading above their respective 20-day moving averages, an impressive comeback indeed. Despite some minor uptick in defensive strength lately from sectors like Staples and Utilities, there has been some stabilization in the Financials sector which looks constructive.  Moreover, other important SPX sector constituents like Healthcare (2^nd largest SPX group by market capitalization) have slowly but surely begun to kick into gear. 

Overall, bearish sentiment seems to be an important arrow in the quiver for bulls for 2023 thus far.  Similar to last month, market participants remain unclear as to the endgame for monetary tightening, or how this new Fed balance sheet expansion juxtaposes with this year’s renewed commitment to QT.  Moreover, the uncertainty regarding forward earnings guidance and/or the threat of an impending recession all seem very real.  However, as Fundstrat’s Head of Research Tom Lee mentioned recently, it’s thought that the credit tightening as a result of the banking malaise combined with the uncertainty likely causes inflation to start to roll off sharply in the months to come.

Two possible roads look likely in the months to come.  First, either Tech starts to stall out and reverse from its recent overbought state and other sectors fail to pick up the slack.  This would likely make US Equities vulnerable to a selloff in late April into May.   The second and more probable possibility in my view is that sectors like Healthcare and Financials start to rally to help buoy US equity markets, which combined represent nearly 25% of the S&P 500.  Some stabilization and bounce in the Banks would certainly be a vote of confidence after many have been unfairly punished in recent weeks. 

Importantly, bearish sentiment remains a key positive factor from a contrarian standpoint which should lead to strength in Equities this Spring.  Cash levels have rocketed up to over 6.1 trillion in recent weeks, and exposure to US Equities remains low based on threats of ongoing downward earnings revisions.  Bottom line, it’s thought that this pessimism and concern about systemic banking failure is very much overdone.  

Two key additional factors bode well for Equities to buck the bearish sentiment and continue their recent rally.  First, pre-Election year seasonality continues to show superior performance in 1^st and 2^nd Quarter for 2023.  April has historically proven to be a very strong month for US Stocks and lags only January in its pre-election year positive return tendencies.  This seems like a strong tailwind for risk assets.

Second, cycle composites based on a confluence of historically accurate cycles all show a much better year for 2023 than 2022.  As mentioned last month, many International equity indices like France and the UK have seen their respective benchmarks rise back to new all-time high territory.  While the US underperformed over the last six months since the peak in Fall 2022 vs. Europe, this has been insufficient to break larger uptrends in place in US outperformance which have spanned more than a decade.  Growth has snapped back vs. Value, and Small-caps have begun to stabilize in recent days following a regional-bank led period of underperformance.  Given the recent downturn in both Treasury yields and the US Dollar, it’s thought that both of these remain key bullish arguments for US equities and both Yields and the Dollar could still weaken through the month of April.

Overall, it looks right to be positive in Q2 given a combination of bearish sentiment, improving breadth, seasonal tailwinds, and a declining inflation picture.  Technicals have certainly improved for risk assets in recent weeks. The ability to recoup SPX 4200 should help this market rally broaden out even further.  If sentiment starts to become bullish into mid-April on further gains, a pullback would be a definite possibility into May.  However, given no evidence of Technology weakening, I believe it’s right to trust this move in Tech, and back to Growth regardless if earnings are poor.  Trends are improving and the bullish seasonal month of April awaits.

Methodology

• Relative strength vs. sector and index At/near 26-week and/or 52-week highs
• Positive momentum and/or Upward sloping moving averages on multiple timeframes
• Lack of DeMark exhaustion on daily, weekly, monthly and/or in combination based on TD Sequential and/or TD Combo indicators
• DeMark “TD 13 countdown Buys” utilizing TD Sequential and/or TD Combo indicators at/near lows on multiple timeframes
• Elliott-wave theory
• Positive momentum divergences (at/near lows for buy candidates), Lack of deterioration within its sector and at/near upper quartile of its annual range
• Above-average bullish bases for lengthy timeframes which might precede technical breakouts

Additions

CBOE Global Markets (CBOE 0.22% - $134)

CBOE looks right to have exposure to given its recent strength as part of the broad consolidation pattern which has kept this stock sideways over the last five years. While the Financials space has been under pressure in recent weeks, stocks like CBOE have been slowly but surely gaining ground. Furthermore, CBOE has managed to improve its relative strength among its peers dramatically since last Summer, showing much better absolute strength than NDAQ, or CME.  Short-term momentum is positively sloped and rising, and gains look likely up to $138 initially with movement above leading up to $150.  CBOE’s entire pattern since 2018 resembles a giant reverse Head and Shoulders pattern, and its recent uptick in momentum likely helps this follow-through in the weeks to come.  Support lies at $116 and can’t be breached without postponing the rally.

Additions

CBOE Global Markets (CBOE 0.22% - $134.24)

Transdigm (TDG 0.61% - $737.05)

Deletions

Northrup Grumman (NOC -0.81%  – $461.72)

Laggard deletions- Exiting the three laggards heading into April. These will be revisited at a future date, but removing TSLA, GME and EXPE.

Upticks