January 25, 2023
Good morning,
A key long-term breadth indicator (a technical signal), the percent of stocks above their 200-day moving average (dma), confirmed recent short-term breadth thrusts yesterday. The market has finally given longer-term confirmation of the short-term positive signals registered in October and November last year. What does this mean to our recent market narrative?
It does fly in the face of the year-end consensus among market strategists – that a weak first half of the year would be followed by a rebounding second half. But who cares about month-old strategist consensus anyway. First, while the percentage of stocks above their 200-dma is key, it is not the only confirming indicator this week. Several models that cover a wider array of indicators also turned positive. I think the market message from these confirming indicators is that stocks have risen in hopes of a soft-landing intensity. The indicators suggest market strength could last for weeks to a few months. One possibility is that the economy proves to be more resilient than most economists think, allowing the Fed to continue to hike, even if at a slower pace. Pricing out short-term recession risks could allow for the rally to continue into Q2. Then, as the economy falls under the weight of higher interest rates, the market prices in a recession.
Objectivity, discipline, and flexibility are some of the most important characteristics of successful money management. I strive to avoid anchoring in on any prediction, but I think this week’s positive technical evidence squares nicely with Ned’s year-end message mentioned a few times in these Morning Notes. “The market will trade in the same range it has been in for the last six months (S&P 500 high of 4300, low of 3500 = approximately +10% / -10% from today’s close at 3920).” We may just be exploring the upper end of that range sooner than expected by consensus.
Be well,
Mike