Daily Stock Market Articles

"Big" Winners
Fri, Apr 28, 2023

Whenever you see a list of best-performing stocks, it’s inevitably loaded with many small stocks that most investors have never heard of. This year, though, it’s practically been the opposite trend as the two top performing stocks in the S&P 500 on a YTD basis – Meta Platforms (+96%) and Nvidia (+88%)- are not only household names but they also have market caps of more than $500 billion. We’d also note that both stocks are also more than 30 percentage points ahead of the next closest stocks in terms of top YTD returns.

With such strong returns among the largest stocks in the S&P 500, the YTD performance spread between the market-cap-weighted S&P 500 and its equal-weighted counterpart is among the widest ever seen on a YTD basis through the end of April. Through Friday afternoon, the market-cap-weighted S&P 500 was up 8.26% while the equal-weighted index was up just 2.13%. At 6.14 percentage points, the YTD performance gap between the two indices is the second widest since 1990 trailing only the 6.8% percentage point gap in 2020. Besides 2020, the only other year where the gap was wider than two percentage points was in 1997. While it’s a small sample size and history doesn’t always repeat itself, we’d note that the S&P 500’s rest-of-year performance was a gain of over 20% in both of those years. Just saying.

Besides the two other years where the performance gap was significantly wide like this year, what stands out about the chart below is how common it has historically been for the market cap-weighted index to underperform the equal weight index in the first four months of the year. Including this year, the cap-weighted index has only outperformed nine times in the last 34 years.

 

May’s First Trading Day: S&P 500 Higher 72% of the Time

Next Monday, the first trading day of May, has a bullish history over the past 25 years. DJIA, S&P 500 and NASDAQ have all averaged around 0.4% on the day. S&P 500 has the best track record, up 18 times or 72% of the time since 1998. With an average gain of 0.22%, Russell 2000 is slightly weaker. May’s first trading day’s worst loss was in 2020. DJIA and S&P 500 shed over 2.5% while NASDAQ and Russell 2000 dropped over 3%.

 

Everything You Ever Wanted to Know About Sell In May
Posted on April 28, 2023

Buckle up, as one of the most well-known investment axioms is nearly here, the ‘Sell in May and Go Away’ period, otherwise known as Sell in May. This gets a ton of play in the media, as these six months are indeed the worst six-month combo out of all scenarios, while stocks also did quite poorly last year during this timeframe as well, only adding to the likely hype.



The thinking is you are better off to simply ignore these six months and go away. Turns out, from May through October the S&P 500 is historically quite weak, up only 1.7% on average and higher less than 65% of the time, making it indeed the worst combo.

Of course, 1.7% is still a positive return, so maybe we shouldn’t just blindly go away? That is our take and there are other reasons not to fear these worst six months in 2023. Sure, more volatility and scary headlines could happen, but with overall market sentiment extremely bearish and the economy on firmer footing than most think, we’d use any seasonal weakness as an opportunity to add to core positions.

Here’s something I bet most investors don’t know, May has been really strong lately for stocks, higher an incredible nine of the past 10 years. Maybe we should call it Sell in June?



Let’s take a closer look at that one year over the past decade that stocks fell in May. Turns out, one potential hiccup is May is the second worst month of the year for stocks during a pre-election year, with only September worse. In fact, these are the only two months with a negative return during a pre-election year, with May down 0.1% and September down 0.7%. Even in the bullish 2019 (when stocks gained close to 30%), stocks still lost more than 6% in May of that year.



Last year was a great time to sell and go away during these historically weak six months, but that wasn’t always the case. In fact, over the past decade, stocks only fell twice these six months, last year and 2015. Looking at the past decade shows that these six months have been up nearly 5% on average versus the 1.7% return going back to 1950.



We’ve noted many times the past several months how historically strong pre-election years were for stocks, well, what about Sell in May in a pre-election year? As you can see below, the returns are right about average, up 1.8% during these six months in a pre-election year. What stands out more to me is how poorly these six months are during a midterm year, playing out well last year for sure.



Now here’s where things get quite interesting. It turns out how things are going heading into these six months can often give a clue what might happen. When stocks are down year-to-date heading into these six months the return drops to 2.3% and is higher less than a coinflip of the time. Given this was the scenario last year, along with a midterm year, maybe a rough time wasn’t such a surprise? Now the good news is when stocks are up for the year (like 2023), these worst six months actually gained more than 4% on average and were higher more than 75% of the time. This could bode well for potentially better returns these six months in 2023.

 

Why This Stock Market is Like The Michael Jordan Chicago Bulls
Posted on May 2, 2023

“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” -Michael Jordan

One of the big knocks we keep hearing about this bull market is that it is being led by only a few names. I was on Fox Business with Charles Payne yesterday and the guest before me was spouting off the same stats we’ve been hearing for months now. It has been widely reported that the largest two stocks in the S&P 500 (Microsoft and Apple) represent close to 40% of the rally this year and the FAANG names (Meta (formerly Facebook), Amazon, Apple, Nvidia, and Alphabet (formerly Google) account for about 80% of the year-to-date gains.

Here’s what they don’t tell you, this is perfectly normal. You will always have the best stocks account for most of the gains. I compare this to the Chicago Bulls when they won six championships. Just because they had the best player of all-time, do those trophies not count the same? You want your best players to score most of the points. Steph Curry just dropped 50 in game 7 of a series and I’m pretty sure they advanced to the next round, even though he scored most of his team’s points.
Again, your leaders are your leaders and they will count for much of the gains, but the truth is many stocks are going higher. What’s the easiest way to show that it isn’t just a few stocks that are going higher? I like to use advance-decline (A/D) lines for this purpose. An A/D line is simply a cumulative total of how many stocks went up or down each day. Throughout history, we’ve seen A/D lines break out to new highs before the indexes, while they also breakdown well ahead of actual price. This is one of the best ways to see what is really happening under the surface.

Well, the Dow A/D line recently broke out to new highs after consolidating for more than a year. With the Dow itself about 6% away from new highs, this is a clue that the nearly 125-year-old index will probably be following the A/D line to new highs sooner than later.



Turning to the S&P 500 A/D line we see another potentially bullish scenario. This one hasn’t quite broken out to new highs, but it is extremely close. Take note how this has trended sideways for the duration of the recent bear market, implying the tailwind for a bull market wasn’t happening. Well, should this breakout (like we expect), it very well could suggest continued strength the rest of 2023 and potentially further.

 

Recent 21-Year May Seasonal Pattern: Rough Start to Historically Choppy Month

Historically, the first two or three trading days of May have logged gains. That has not been the case this time around. Recent market volatility suggests a day of gains could prove challenging, especially as the market awaits the Fed’s next move tomorrow. Additional bouts of weakness often appear in May around or on the third, sixth, and twelfth trading days of the month while the last four or five trading days have generally enjoyed respectable gains on average. In pre-election years it has generally been better to lighten up on long positions early in May as the entire month tends to be weak with DJIA and S&P 500 finishing with average losses (pages 42 and 44 of Stock Trader’s Almanac 2023).NASDAQ and Russell 2000 have performed best in pre-election year Mays.

 

Midterm Best Six Months 19-0

The Best Six Months November-April that begin in the Midterm is now 19-0, undefeated since 1950! These kinds of records are made to be broken, but not when it is based on such a sound and strong market seasonality.

Now that the S&P logged a 7.7% return for the Best Six Months that just ended in April, it is time to reposition to a more neutral stance over the Worst Six Months May-October when market risk is elevated.

We don’t just Sell in May and go away, we reposition in May. Sell some things, cut losers, tighten up stops, limit new longs and move into bonds and sectors that do well in the Worst Six Months.

 

The Last Hike?
Posted on May 3, 2023

By the time most of you read this, there’s a good chance the Fed hiked rates by 25 basis points to 5.25%, the 10th consecutive hike from a low of 0.5% during the depths of COVID. We have no clue if this is their last hike, but odds are we are getting quite close.

Let’s make this blog quick and easy. What if this is the last hike? Well, I went back and found the past 10 ‘last hikes’. Take note, it wasn’t until 1994 when the Fed actually announced their rate hikes for the whole world to know, so data before then isn’t always uniform. But for this, I’m using Bloomberg data.

Looking at those 10 cycles of higher rates showed that stocks were up one year later eight times and up more than 14% on average a year later after the last hike. Yes, May 2000 is in there and we all know how poorly stocks did after that hike, but for the most part, we find it hard to justify turning wildly bearish if this is indeed the final Fed hike. There are no doubt other reasons for worry, but this might not be one of them.



Here’s the same data, but shown a different way.



Please continue to follow Carson Investment Research, as we will break down the latest on the Fed’s decision and everything else regarding the macro and investment landscape. But on the lookout for a blog from Sonu tomorrow on the Fed’s decision and then on Friday regarding the monthly employment data.

 

Sentiment Slouches
Thu, May 4, 2023

The S&P 500 has firmly turned lower in the past few days and is nearing the lows from last Wednesday. In spite of that turn lower, bullish sentiment was unchanged at 24.1% per the latest AAII sentiment survey. Although less than a quarter of respondents reported as bullish, that reading is only in the middle of the past year's range of readings as bullish sentiment has consistently been hard to come by.



With no change to bullish sentiment, all of the moves occurred for neutral and bearish sentiment. Neutral sentiment has declined for three weeks in a row, coming in at a six week low of 31% this week.



All of those declines to neutral sentiment were picked up by bears as that reading rose 6.4 percentage points to 44.9%. That is the highest reading since the end of March and right in line with the average reading of bearish sentiment since the beginning of 2022.



With bearish sentiment moving higher, the bull-bear spread moved more firmly into negative territory. This week, bears outnumbered bulls by 20.8 percentage points; the widest spread in five weeks. That indicates the predominant share of respondents continue to expect the S&P 500 to head lower over the next six months.



That negative outlook by individual investors is nothing new. Following the record streak of 44 straight weeks of a negative bull-bear spread that ended in February, the spread has resumed another lengthy streak of negative readings. This week marked the eleventh straight negative reading in the bull-bear spread. Even in the more recent context of the aforementioned record streak and another double-digit streak in the first quarter of last year, the AAII survey has seldom seen bears outnumber bulls on such a consistent basis.



Factoring in other sentiment surveys like those from Investors Intelligence and NAAIM reaffirms the bearish tones of sentiment. With all three surveys combined, our sentiment composite remains firmly negative meaning sentiment is more bearish than average. We would also note that due to the timing of the collection of these surveys, they would have mostly missed any reaction to the FOMC's rate decision and market response yesterday. As such, next week's surveys will be the first to fully reflect the latest 25 bps hike and subsequent market declines.

 

Initial and Continuing Claims in Opposite Directions
Thu, May 4, 2023

The latest reading on initial jobless claims disappointed coming in at 242K versus expectations of 240K. That is up from last week's downward revision to 229K. As shown in the inlaid chart below, claims have moved up to some of the highest levels in a over a year with the past several weeks marking relatively range bound readings. This week's increase to 240K marks a move to the high end of that recent range.



Before seasonal adjustment, claims came in at 219K. That is roughly in line with the readings of the comparable week off the year for the past few years excluding 2020 and 2021 when claims were more elevated due to the pandemic. Claims are also generally following seasonal trends with the current week having consistently seen declines week over week historically. With that said, claims have yet to make a new low on the year.



Whereas initial claims were a slight disappointment, continuing claims surprised with an improvement this week. Rather than the increase to 1.865 million that was expected, they dropped all the way down to 1.805 million, the lowest reading in three weeks. Albeit improved in the near term, the uptrend in continuing claims remains in place as claims are around the highest levels since early 2022.

 

May the Fed be With You
Posted on May 4, 2023

Happy Star Wars Day, or if you’re fan like I am (or have a birthday today like I do), May the 4th be with you!

Of course, the title is a play on all this, but I find it apt since the Federal Reserve (Fed) looms so large as far as investors are concerned.

The good news is that their aggressive rate hike campaign to fight inflation appears close to the end. It saw them raising rates by 5%, including the latest 0.25%-point increase they just implemented. The federal funds rate is now in the 5-5.25% range, which is the highest it got to during the mid-2000s economic expansion.



The rate hike in May was expected, but what was more welcome was the fact that the Fed didn’t think that “additional policy firming may be appropriate”. While this is not an explicit signal that they are pausing, it did signal that they will be more data dependent. Fed Chair Powell explicitly referenced this when he talked about the future direction of policy, saying it will be assessed based on incoming data, including employment and inflation. Plus, they’ve done a lot – and they believe the economy is yet to reflect the full impact of that.

However, as we wrote in our 2023 outlook, the big question for policy this year wasn’t how high they’ll go. Instead, the question was how long they’ll stick with high interest rates, which they view as “sufficiently restrictive” to bring inflation down to their target of 2%.

Here we have a disconnect.

Markets vs the Fed
In his post-meeting press conference, Powell was fairly clear that they remain focused on getting inflation back down to target. Inflation has moderated but remains elevated. Their forecasts don’t suggest inflation will pull back in rapid fashion, which means rate cuts would NOT be appropriate.

On the other hand, markets are well ahead of the Fed. Investors estimate that there are no more rate hikes coming, and even beyond that, they expect the Fed to cut rates a few times before the end of the year. The chart below shows the difference between expected federal funds rate in December 2023 and June 2023. The difference right now is more than 80 basis points (0.80%), indicating at least 3 rate cuts of 0.25%-points each in the second half of 2023.



We wrote about this disconnect after the Fed’s prior meeting in March, but it is surprising that it hasn’t resolved yet. In fact, rate cut expectations increased after Powell’s press conference.

You can also see how rate cut expectations surged after the SVB crisis hit, but we’ve also seen a lot of volatility in these expectations since then – as you can tell from how expectations moved after the SVB crisis hit.

Recession expectations
It appears that investors are expecting a recession in the second half of the year, which will force the Fed’s hand. However, it can be useful to look to history to put current expectations in context.

I looked at the last 3 rate cut cycles that came about amid recessions, and on average the Fed has cut rates by about 525 bps over 1.5-2 years. The table below shows the list. The 2020 recession was excluded because it was so short, both the recession and the rate cut cycle.



One thing you can see above is that the timing of the first rate cut is 0-3 months ahead of the start of a recession.

Markets are currently pricing the first rate cut in September 2023. Based on history, that would point to expectations for a recession starting between September and December 2023.

Meanwhile, investors expect the federal funds rate to be about 2.9% by the end of 2024, i.e. 19 months from now. That is about 220 basis points lower than the highest rate expected this cycle, of 5.1% (where the fed funds rate is currently).

Using a very simple calculation, and the fact that historically the Fed has cut by an average of 525 basis points, this would imply that the probability of a recession is just over 40% (220 divided by 525). In short, that is akin to rolling a 6-sided die and the odds of seeing a 5 or a 6 come up.

That is high. However, 42% is less than 50% and that means the base case is not a recession. Obviously, this is subject to a lot of noise, and crucially, these odds can change. Just two weeks ago, the expectation was for about 170 bps of cuts by the end of 2024. That translates to a recession probability of 32%.

The increased odds of a recession after the Fed’s latest meeting and Powell’s post-meeting comments suggests that markets think the Fed is biased toward overly restrictive policy in their quest to tame inflation. Which in turn will lead to a crisis and/or recession, forcing them to reverse course and make cuts.

Fighting the Fed appears to be what investors are doing right now, even as the Fed tries to hold firm. So, expect bit of a bumpy ride as their views converge. And circling back to the title, may the Fed be with us all!

 

Seasonal Mid Point
Fri, May 5, 2023

Today marks the midpoint of spring, so from here on, we can say that we're closer to summer than winter. Summer isn't typically thought of as a positive time for equities, but as highlighted in the "Seasonality" section of our Morning Lineup today, the next three months, which is the period straddling the back half of spring and the first half of summer, has been relatively strong in the last ten years. The table and charts below summarize the performance of the S&P 500 ETF (SPY) and each sector-tracking ETF from the close on May 5th through August 5th. The S&P 500's median performance during this period over the last ten years has been a gain of 5% with positive returns 90% of the time. Leading the way higher, Health Care (XLV), Real Estate (XLRE), and Technology (XLK) have all experienced median gains of over 5% with positive returns 85% of the time or more. In addition to XLV and XLK, Consumer Discretionary (XLY) and Consumer Staples (XLP) have also been up during this period in nine of the last ten years. On the downside, the only sector that has had a negative return on a median basis has been Energy (XLE). Ironically, even last year when the sector outperformed the broader market by a significant degree, it not only declined (-8.3%), but it also underperformed the S&P 500 by a wide margin during this three-month stretch.

Looking at the last ten years, in every year since 2013, there have only been two years that the majority of sectors in the S&P 500 declined during this period (XLRE price data doesn't begin until 2016 while XLC didn't start trading until June 2018). Last year, six of eleven sectors traded lower even as the S&P 500 had a marginal gain, while in 2019, eight of eleven sectors declined as the S&P 500 fell 3%.

 

Don’t Fear the Seasons – Sell in May

But don’t go away. We actually sold some positions in April when we issued our MACD Best 6 Months Seasonal Sell Signal to Almanac Investor subscribers. Reposition in May is a better strategy. Best & Worst Months stats plus a compounding onetime $10K investment tell the story. Can’t argue with success.

Worst Six Months May-October is not a binary selloff. Risk is elevated historically, stocks tend to be volatile, moving sideways with choppy trading – illustrated in the chart. Anyone who tries to refute this by going back past WWII is making a moot point as the seasonal pattern was inverted when our economy was agrarian driven in yesteryear.

We sold $DIA & $SPY, plus other seasonal sector trades, underperforming stocks and rotated into some bond ETFs. This is the time of year we shift to a neutral stance – between our Dow/S&P Best Six Months MACD Sell Signal and our NASDAQ Best 8 Months MACD Seasonal Sell on or after June 1.

Everyone gets hyper focused on whether you should Sell in May or not. But forget as I like to say: “Buy in October and get yourself sober.” From my October 4 Buy Signal to my April 25 Sell DIA and SPY trades were up 10.8% and 8.2% respectively. QQQ is up 15.5% from the October 4 Buy as of midafternoon trading today.

If there is any year it’s time to get defensive in May, it’s this year. With the debt ceiling showdown, the banking crisis, inflation, interest rates and the slowing economy, it is a perfect time to move to the sidelines and enjoy the healthy yields in bonds.

 

Megacaps Still Carrying Their Weight
Mon, May 8, 2023

Heading into earnings season, there was a considerable amount of angst on the part of investors regarding the mecacap stocks and how they would react to their earnings reports. Given their outperformance in Q1, the prevailing view was that the bar was too high, leaving the megacaps susceptible to disappointment when they reported. Within the S&P 500, there are seven companies whose weighting exceeds 1.5% in the index, and in the chart below we list the performance of each company's stock (largest to smallest) on the earnings reaction day of their most recent report. Of the seven companies highlighted, only two (Alphabet and Amazon.com) declined in reaction to their reports. Two stocks (Nvidia and Meta) surged more than 10%, one (Microsoft) rallied more than 7%, and Apple, with its weighting of over 7%, managed to rise more than 4.5% following its report last week. There's still a ton of reports left to get through before earnings season winds down, but on a market cap basis, we're past the peak, and based on the reactions of the largest companies in the market, it's been a much better earnings season than most investors expected.

 

Stocks Love Day Before Mother’s Day Better

With just a few days until Mother’s Day, this is also a reminder. Always used to plant flowers with mom and pick the fresh blooming lilacs. Over the last 28 years on the Friday before Mother’s Day Dow has gained ground 19 times. On Monday after, DJIA has advanced 17 times. Average gain on Friday has been 0.26% and 0.23% on Monday. However, Monday following Mother’s Day has been down 8 of the last 11 years. In 2019, DJIA suffered its worst post Mother’s Day loss going back to 1995, off 2.38%.