Mon, July 3, 2023 | 4:00PM ET

2H2023 Technical Outlook

Name: FS Insight
Price range: $$$

Mark L. Newton, CMT ^AC

Head of Technical Strategy

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Conclusions:

Gains of 10-15% more are likely in 2H 2023 for US Equities – Raising my technical target from 4500 to 4700 – Recent broadening out in market breadth has not yet been followed by an equal broadening out in bullish sentiment.
Risk-on Sectors still preferred – Technology and Industrials are intermediate-term bullish, but likely require consolidation into fall of 2023. My other two 2023 picks for outperformance discussed in January, Energy and Healthcare, likely should make a comeback in 2H 2023.
Heightened chance of consolidation from late July into September, and also Mid-November-December this year, so gains likely won’t be uninterrupted. Important to keep a close eye out for negative momentum/breadth divergence, complacency/speculation, and sharp increase in Defensive, which tend to occur ahead of market corrections.
US Dollar index likely pulls back to new 2023 lows given less hawkish monetary policy than BOE and/or ECB, and/or possibility of FOMC hikes causing economic weakness
Commodities likely to have a much better Q3/Q4 than first half of the year. Precious metals and Energy have a good chance of snapping back following a difficult first half 2023.
Emerging markets also should strengthen in 2H. India leads the way, but expect a continued rebound out of Latin America, while China should also begin to rally.
Treasuries are likely to strengthen in the weeks/months to come. Yields have reached resistance and a pullback to test Spring lows looks likely. However, trends call for yields to rally in 2024.

Let’s review the Positives which have kicked in over the last seven weeks since mid-May:

Rallies have become more broad-based: Industrials, Discretionary, Materials, Comm. Svcs have all shown strong outperformance
Additional strength has begun to materialize: Two other sectors, Financials, and Healthcare have just begun to stabilize and strengthen heading into the end of June, Meanwhile Transportation has just begun to break out
Cycles suggested a late Spring bottom- May/June: My weekly Cycle composite has turned up sharply right on schedule – Following 3 out of 5 down months for Equal-weighted S&P 500, this was precisely when SPX began to broaden out
Sentiment has only recently started to recognize the rally in indices after having been bearish all year. This isn’t exuberance and most Institutions are “NOT” going “All-in”
Seasonality trends remain quite bullish for Pre-election years and markets have just let the best two quarters of the entire four-year cycle. However, July normally is also still bullish

Warning Signs to Look For to think Market correction will happen (Most of these are absent now)

Evidence of Speculation and complacency – While a few investor sentiment polls have gotten more optimistic, these are not yet at levels of complacency/speculation that have resulted in prior market downturns
Defensive strength – When Utilities, Staples, REITS begin to strengthen sharply on an absolute and relative basis, this normally can precede market corrections
Negative momentum/breadth divergence – When fewer and fewer stocks are participating in rallies, this has served as a warning – see early 2020, as well as 2021, as examples
Seasonality concerns – US stocks are now leaving the best two quarters of the entire four-year cycle. While Pre-election years as a whole tend to be bullish, the back half of 2023 could show more volatility
DeMark exhaustion – When TD Combo, TD Sequential 13 countdown signals appear on weekly and/or monthly charts, markets can show potential trend reversals
Trend deterioration in key market sectors like Technology and Financials: If/when these sectors start to break existing uptrends, markets can face possible headwinds
Overbought market conditions on weekly, monthly basis – While some investors have remarked that US Equities are overbought, this has mainly only been seen in QQQ, and not DJIA, nor weekly or monthly charts of Equal-weighted SPX
Intra-market divergence – Markets are healthiest when indices are moving up in tandem. When this changes and various indices start to lag, that can be problematic and a warning

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Analyst Certification (Reg AC)

Mark L. Newton, CMT, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. There is a possibility that we will from time to time have long or short positions in, and buy or sell, the securities or derivatives, if any, referred to in this research.

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