May 2023 Upticks

Update

April certainly brought about some surprises, and it’s no stretch to say investing has become a bit more difficult in the last month, despite S&P having risen five of the last eight weeks.  Violent sector rotation has wreaked havoc with positioning, but stock indices remain generally in good shape from a structural perspective, despite some recent slowdown, technically speaking.  April’s last few days of gains helped prices successfully log a positive return of nearly 2%, the best month since January, though trends heading into mid-May show prices largely at the same levels as mid-April nearly a month ago.  Overall, this remains a market where participants have been slow to embrace the rally, given ongoing concerns about the Fed’s plans to cease monetary tightening along with recession fears, earnings issues and ongoing wrangling regarding the Debt ceiling impasse.

Four factors suggest that the months ahead could prove far more difficult than bulls might expect, despite prices having shirked off most concerns, defying gravity since mid-March.  First, seasonality is turning more negative from May into October.  While October 2022 – April 2023 brought about the sweet spot for pre-election year performance, which largely went according to plan, this has now reached conclusion. May tends to have a negative performance record going back 90 years with an average return of (-0.20%)  Second, sentiment has slowly but surely gotten more bullish in recent weeks, as might have been expected given the rally off of the March lows.  Polls like Investors Intelligence and Fear and Greed index have both shown markedly better readings over the last eight weeks since the mid-March lows. 

Third, sector rotation has proven important and meaningful over the last few months.  Over the last 30 days, four of the five leading Equal-weighted Sector ETF’s have been defensive in nature.  Technology’s bounce in April proved short-lived and this sector turned down sharply into late April.  While large-cap growth stocks like AAPL-2.19% , MSFT-2.05% , META-2.55% , GOOGL-2.04%  certainly have carried the load in recent weeks, Equal-weighted Technology paints a more negative picture, as Equal-weighted Technology’s ETF has violated a lengthy uptrend vs. the S&P 500 in absolute terms.

The combination of Technology’s lagging performance and Regional Banks undergoing downward pressure has proven to be a difficult environment in which stock indices are unable to exert superior market breadth.  Healthcare has certainly come to the rescue in the short run, and this remains one of the best areas to position near-term in May through July, given historical seasonal tendencies.  However, it’s not incorrect to state that the broader market rally off the mid-March lows has certainly lacked the kind of breadth which would make the recent advance more inspiring in the eyes of many market participants who are paying attention.

Specifically, fewer stocks are now trading above their respective 50-day moving averages than was seen back in November or August of 2022.   Breadth concerns are now being joined by near-term boost in bullish sentiment and bearish seasonality to suggest that a 5-10% pullback might get underway starting in mid-to-late May into June or July.

The most likely scenario calls for a market peak in the period directly following May expiration which might lead Equities lower before a bottom and rally into the Fall.  Technology looks more vulnerable than a few months ago, with stocks like AAPL having rallied up to important resistance near former highs.  Financials, despite having rallied over the last month, have seen a meaningful divergence between Large-Cap Money center banks vs. Regional banks.  While a near-term oversold bounce is overdue for Regional Banks, it’s difficult to find this group attractive on an intermediate-term basis.  Any upcoming bounce in the Regional Banks is thought to prove short-lived. 

Interest rates and the US Dollar both look to have a negative technical trajectory for the month of May, but both could stabilize and start to turn higher as June gets underway, based on an upcoming reversal in my Cycle composites for both.  Furthermore, despite cyclical projections for Equities showing a much better year in 2023 than 2022, I don’t expect that gains will be linear and without consolidation. 

Style-wise, Growth has maintained its upward trajectory vs. Value, thanks to Large-cap Technology working well, while Energy and Financials have proven sub-par.  Small-caps and mid-caps have both struggled, meanwhile to match the performance of Large-caps, and the deterioration in Regional banks has certainly played a role in recent underperformance.  Bounces in Regional banks should help Small caps rally, but oversold rallies in this sub-industry could prove tactical until Fall 2023.

Overall, while a positive outlook appears proper for May, barring evidence of any technical deterioration, the risks appear to be growing.  Upside looks to be capped near SPX-4325 near last August’s peaks, but any advance above 4250 should be considered high risk for those with a shorter-term timeframe of 2-3 months.  QQQ-1.77%  should face resistance near 328.

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

Intuitive Surgical (ISRG-1.69%  – $303.47)

ISRG-1.69%  looks attractive at current levels following a big jump in momentum in recent months. This stock has been the 3rd best performing stock of any within the SPDR S&P Healthcare ETF (XLV-0.20% ), with a return of +22.98% in data through 5/10/23. Its push last month to exceed former December 2022 peaks at $185 was thought to be bullish, and should allow for near-term upside to $326. (Additional upside resistance lies near late 2021 peaks at $369.69.) ISRG has begun to show attractive relative strength within the Healthcare sector at a time when Medical Devices stocks have shown marked technical improvement in recent weeks. Equipment stocks look more attractive than Biotechnology, and ISRG should likely be able to outperform in the months ahead given Healthcare’s seasonally strong performance which normally lasts through July. While weekly momentum has neared overbought levels, pullbacks should offer a chance to buy dips, with $285-$295 being a sweet spot for downside support in the weeks to come. Overall, momentum and technical structure remain positive, and ISRG looks attractive here technically.

MasterCard (MA-1.20%  – $383.39)

MA’s recent progress in 2023 has helped to propel this stock to the top tier of performance over the last one, three and six-month periods (MA is in the top 10 performers out of all 73 names within XLF in each timeframe). This boost in relative strength is apparent on daily charts , which show the stock to have advanced to within striking distance of all-time highs. While many in the Regional bank space remain under pressure, the credit card companies within Financials look more attractive for long positioning, expecting outperformance.

Former all-time highs happened back in April of 2021, giving way to a lengthy period of consolidation. This took the form of a decline into October 2022, followed by a rally to within reach of all-time highs. Resistance should materialize at $400 initially, or around 5% higher from current levels. However, I believe this broad base should eventually give way to a push back to new all-time high territory given its increasing amount of tests since the initial peak was made just over two years ago. Momentum is nearing overbought levels, but remains positively sloped, and the ability to have recently surpassed late 2022 highs makes this an appealing technical risk/reward in the near-term within a sector that’s fallen out of favor in recent months. Overall, MA-1.20%  looks attractive on a short-term basis technically and the act of climbing back above $400 would add to its intermediate-term appeal. Support on pullbacks should materialize near $370.

Deletions

Microsoft (MSFT-2.05%  – $295.40 – Price from 4/26/23 when MSFT was officially removed)

Progressive (PGR1.76%  –$133.86 – Price from 4/26/23 when PGR was officially removed)

Upticks