The Trifecta of Bullish Posted on February 1, 2023 As we noted yesterday, 2023 is off to a great start for stocks, especially when compared with what we saw in 2022. Well, here’s another potentially bullish development that just triggered. I call it the Trifecta of Bullishness. Yes, I made it up, but I like it. Stocks were up nicely in January, we know that. But the S&P 500 also gained during the normally bullish Santa Claus rally period (the last five days of the year and first two of the new year), along with adding 0.8% the first five days of the year. It turns out that, historically, when all three of these are hit in the same year, the future returns are quite strong. In fact, the full year has gained 17.5% on average and closed the year higher more than 90% of the time. 1966, 2011, and 2018 were the only years out of 31 that closed in the red. Taking things one step further, the S&P 500 saw a peak-to-trough correction of nearly 10% at some point on average during those years, compared with nearly a 14% peak-to-trough in your average year. So, returns were stronger and there was less volatility; not a bad combo. This is just one bullet point, I concede, but when layered on top of the others we’ve noted in the past few months, we continue to think 2023 has the potential to be better for the bulls than most are expecting. What happens after a Trifecta of Bullish on the heels of the previous year in the red, you ask? Incredibly stocks gained the full year every time (9 for 9), and the full year added more than 27% on average. We aren’t expecting stocks to gain that much in 2023, as we are on record of looking for between 12-15% this year, but this study does little to change our optimistic outlook. I will leave on this, one of the big worries from the Fed has been wages. If wages stay high, we could be looking at a 1970s style of higher for longer inflation. Yesterday, the Employment Cost Index (ECI) fell to only an increase of 1% in Q4. This was lower than expected, and now three consecutive quarters of declines (the longest quarterly decline streak since late 2004). Why does this all matter? It shows inflation is indeed showing signs of being under control, which means the Fed is increasingly likely to end its historically aggressive series of rate hikes sooner. Fed Chair Jerome Powell was on record as wanting to see the ECI trend lower and that is exactly what we are seeing now. The Carson Investment Research team increased our view on equities to overweight in late December for a myriad of reasons, but one of the main ones being lower inflation could be a bullish catalyst in 2023.
Layoffs Still Not Showing Thu, Feb 2, 2023 Jobless claims continue to impress with the latest reading on seasonally adjusted initial claims dropping to 183K which is the lowest level since April 2022. Claims have now declined in four of the last five weeks and have shown sub-200K prints in each of the past three weeks. On a non-seasonally adjusted (NSA) basis, claims are falling sharply as would be seasonally normal at this point of the year. In fact, this week and last are two of the weeks of the year that have most consistently seen a lower sequential reading in claims on a historical basis. As shown in the second chart below, last week has never seen claims move higher week over week while the current week of the year has only seen an increase 9% of the time. While NSA claims were lower this week, it was not by much with the reading falling from 225.23K to just 224.36K. The only other time claims have fallen by less than 1K during the comparable week of the year was in 2006. Although the most recent week's data was not as strong as might be expected given seasonality and that very well could be a result of recent layoffs, claims remain at historically strong levels. As for continuing claims, which are lagged an additional week to the initial claims number, the latest reading came in at 1.655 million versus expectations for an increase to 1.684 million. Unlike initial claims, continuing claims are much further above last year's lows, however, the past several weeks have marked a pause in what had been a steep uptrend that had developed in the back half of last year. Additionally, as for the actual level of claims, the most recent readings remain impressively strong and consistent with pre-pandemic levels that had not been seen in around 50 years.
Sentiment Streak Over Thu, Feb 2, 2023 Given the collection periods ending last night at midnight at the absolute latest, the latest sentiment surveys would have hardly captured shifts in outlook following the latest FOMC decision or the strong market reaction to the FOMC. That is to say, the latest AAII sentiment survey can be considered a bit stale. Regardless, the latest week's survey from AAII showed a modest increase in the percentage of respondents reporting as bullish. While still below the high of 31% from two weeks ago, 29.9% of investors reported as bullish this week. It is a similar picture for bearish sentiment. 34.6% reported as bearish in the latest week which remains at the low end of the past year's range of readings but slightly above the more recent low from two weeks ago. Without any major shifts in bullish or bearish sentiment, bears continue to outnumber bulls as has been the case for a record 44 weeks in a row. That being said, the bull-bear spread has been showing single-digit readings for three weeks in a row. The only other time during the streak of negative readings that the same could be said was last August. While the record streak of overall bearish sentiment readings lives on for the AAII survey, combining the AAII survey with other sentiment readings like the NAAIM Exposure Index and the Investors Intelligence survey shows sentiment is finally back to bullish, if even just barely. As shown in the first chart below, the average sentiment survey is now very slightly above historical average readings. That is the first time this has occurred in over a year, bringing to an end a record streak of negative readings.
Boom Goes the Labor Market Posted on February 3, 2023 Sometimes a meme can convey a white paper’s worth of sentiment within a single picture; that’s why they spread faster than the news sometimes. so, let’s keep it simple: The economy created 517,000 jobs in January, well above expectations for a slowdown to 175,000. The unemployment rate is at 3.4%, the lowest level since May 1969. It’s like the labor market, i.e., America’s employers are on a mission to upend forecasts of a recession in 2023. Oh, and revisions suggest payroll growth was stronger than we thought in 2022. The Bureau of Labor Statistics now says the economy created 4.8 million jobs in 2022, as opposed to the previous estimate of 4.5 million. Forget recessions and landings; these numbers suggest an employment boom! Strong numbers under the hood The data corroborates what we’ve been seeing in leading employment indicators like weekly initial claims for unemployment, which fell to the lowest level in 9 months last week. Now January data typically tends to be quite noisy due to seasonal effects. But even accounting for that, let’s not miss the big picture that the labor market is looking very resilient, if not outright on fire. The huge payroll gain in January was not due to outsized gains in one sector either. Cyclical sectors like manufacturing, construction, and wholesale/retail trade services all added a total of 85,000 jobs – which goes against the story of a significant slowdown in these areas. Meanwhile, the service industry is on fire. Americans are spending, and employers are responding – including adding 113,000 net jobs across accommodation, restaurants, and bars. Information processing, which includes Technology, and Utilities, were the only sectors that saw job losses. And not a lot, either. What does this mean for the Fed Again, let’s keep it simple with respect to what the Fed will, or will not do. As I wrote after the FOMC meeting, the Fed is downshifting and waiting to see disinflation in the “core services inflation, ex housing” category. This is closely tied to wage growth, and there’s good news on that front. The average hourly earnings (AHE) data that came through with the payroll data shows further deceleration, especially for non-managerial employees, who tend to spend a relatively higher portion of their income. The hourly earnings data can be noisy and subject to revisions, but we also saw the employment cost index (ECI) for Q4 moving lower. The ECI comes out only quarterly, but it is considered the most stable measure of wage growth – so the deceleration in that data should count heavily when thinking about wage growth. The best news amongst all this is that wage growth appears to be slowing even as the unemployment rate is at 50+ year lows. This is not what textbook theory would predict, or forecasters for that matter. But we’ll take reality over that. And Powell’s comments after the FOMC meeting suggest he may do the same. Of course, stronger economic growth means the Fed is more likely to keep interest rates higher for longer (Contrary to market expectations of rate cuts in the second half of 2023). We believe the economy is strong enough to handle higher rates currently. To summarize The employment data shows no sign of a slowdown This suggests the economy is not really slowing, let alone close to a recession Wage growth is trending lower, which should be good news for the Fed as they look to get close to peak rate A relatively stronger-than-expected economy means the Fed is more likely to keep rates higher for longer
FANG Index Has Best One-Month Rally on Record Mon, Feb 6, 2023 "Big Tech" stocks like Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL) have taken a breather over the past few days after reporting earnings last week. It's important to note, however, just how much these stocks had rallied leading up to their near-term highs last week. Through last Thursday, the NYSE FANG+ had rallied 34.44% over the prior month. That was actually its biggest month-over-month rally in the index's history dating back to 2014! As shown below, the index managed to make a "higher low" in early January just before it took off, and it just barely took out its highs from last August when it peaked last week before pulling back slightly. While last week's earnings results provided some negative fundamental catalysts (some of which we highlight in our most recent Conference Call Recaps), there is also the technical aspect that this group of stocks had gotten historically overbought. At last week's highs, the 14-day RSI reached 77.4. Normally, any reading above 70 would be considered overbought. At 77.4, the RSI reading for the NYSE FANG+ index was the most elevated since June 2021 and ranked in the 97th percentile of all days since 2014. After further declines to start out this week, the RSI is still elevated, but back below 70.
Small-Cap Outperformance Continues in February Over the last 33 years the week before February’s monthly options expiration week has had its share of ups and downs. It was up 8 of 9 years across the board from 1990-1998. From 1999 to 2009 the week is littered with red numbers. In the last 13 years the record has been improving. Russell 2000, the small-cap index has been best up 10 of the last 13 years with an average weekly gain of 0.71%. NASDAQ is second best and has also performed well during the week with an average gain of 0.59%, up 9 of the last 13. This strength can be seen in the monthly seasonal pattern chart for February beginning around the fourth to seventh trading days of the month.
$2.9 Trillion in Market Cap Added Tue, Feb 7, 2023 After seeing the total market cap for the Russell 1,000 fall by $10.9 trillion in 2022, we've seen a rebound of $2.9 trillion in market cap so far in 2023. Below is a look at the total change in market cap by sector across the Russell 1,000 so far in 2023 and for all of 2022. The Tech sector saw its market cap fall $4.35 trillion last year, and it has seen its market cap rise by $1.176 trillion to start 2023. Consumer Discretionary's market cap has risen by $701 billion, followed by Communication Services at $516.9 billion and Financials at $373 billion. Four sectors have actually seen their market caps fall this year. Health Care's market cap has fallen the most at -$141 billion, while Energy has fallen $57 billion, Consumer Staples has declined $32.2 billion, and Utilities has fallen $29.9 billion. Below is a look at the biggest gainers in market cap so far this year at the individual stock level. Seven stocks have already gained more than $100 billion in market cap this year. Apple (AAPL) has jumped the most at $333.7 billion, followed by Tesla (TSLA) at +$227 billion, Amazon (AMZN) at +$190 billion, Alphabet (GOOGL) at +$176 billion, and Meta (META) at +$166.8 billion. While the seven biggest gainers to start 2023 have added a combined $1.377 trillion in market cap, they lost a combined $4.86 trillion in market cap in 2022.
People All Over AI Tue, Feb 7, 2023 In today's Morning Lineup post, we compared Chat GPT's rapid emergence into the mainstream to the rise of a number of other products. While Artificial Intelligence, or AI, has been a buzzword for some time now, this year it certainly has been in the spotlight more than in the past. Given the popularity of Chat GPT, some mega-caps like Alphabet (GOOGL) and Baidu (BIDU) have jumped in on the opportunity to announce their own versions. To quantify how in focus AI has become, below we show the Google Trends scores for a handful of related terms. Readings of 100 would indicate the peak in searches for a given topic globally. Searches for "Artificial Intelligence" or its abbreviation have reached a new record while the field of "Machine Learning" has similarly seen searches rip higher and remain elevated in the past year. One interesting area which has not seen searches rise much is in regards to the automotive industry. Searches for "self-driving" have not picked up much within the range of the past few years. That is also well below the record from March 2018 when searches spiked due to a fatal incident involving Uber's self-driving car. That being said, it is worth noting that even before the Chat GPT craze, these searches had been moving higher quite rapidly. As we discussed earlier, although the broad topic of AI is in vogue, related stocks have not gotten much of a boost in reaction to this news. For those having made announcements regarding AI in recent days like Alphabet (GOOGL), Microsoft (MSFT), and Baidu (BIDU), relative strength versus tech more broadly (proxied by the Nasdaq 100 ETF (QQQ)) has not done anything too notable in terms of long term trends. For MSFT and GOOGL, relative strength has been sideways at best over the past year, and BIDU has been moving higher in recent months, but that follows a few rough years for the stock relative to US tech. The same can be said for a more encapsulating basket of AI-related stocks proxied by the Global X Robotics and Artificial Intelligence ETF (BOTZ). While the relative strength has been trending lower (meaning underperformance versus tech more broadly) the past few months have seen a rebound.
Five Clues This Isn’t Just a Bear Market Rally Posted on February 7, 2023 “When the facts change, I change my mind. What do you do, sir?” John Maynard Keynes Stocks are off to a roaring start to 2023, which has many claiming this is just a bear market rally and one that will likely end with new lows. Carson Investment Research has quietly been taking the other side to these vocal bears, saying many times that October was likely the end of the bear market and that better times were potentially in the cards. In fact, we upgraded our view on equities to overweight from neutral in late December and added equity risk to the models we run for our Partners as a result. Two big reasons for our optimism are that we don’t see a recession this year, and everyone is bearish. Regarding the macro outlook, last week’s 517k jobs number does little to change our stance. Additionally, I’ve done this for a long time, and I’ve never quite seen everyone as bearish as they were late last year. Remember, the crowd is rarely right, as we discussed in Is Anyone Bullish? The S&P 500 is up 17% from the October lows, the same magnitude as the 17% rally we saw last summer. Back then, stocks rolled back over and made new lows, something most strategists on tv are saying will happen again. Well, the facts are changing for us, and as Keynes told us in the quote above, we had better change our minds as well. So here are five clues that this rally is on firmer footing and will likely continue. The Trendline The S&P 500 finally broke above the bearish trendline from 2022. As you can see below, each time this trendline was touched, stocks sold off, usually hard. However, this time, stocks broke above the trendline and accelerated higher, a clear change in trend. Not to mention, the S&P 500 also moved significantly above the 200-day moving average, which clues that the trend has changed. More stocks are going up. Even though the S&P 500 is still more than 10% away from a new all-time high, we are seeing more and more stocks making new 52-week highs, yet another sign that this rally, indeed, is different. As you can see below, the first part of last year saw less and less stocks making new highs, a potential warning sign under the surface. Well, today is near 180, with more and more stocks breaking out to the upside. With more stocks strong, the likelihood that the overall indexes follow is potentially quite high. Wider breadth and participation Another clue that more and more stocks are trending higher is that more than 70% of the stocks in the S&P 500 are above their 200-day moving average. This is mostly since late 2021; in other words, more participation than any time we saw last year. As the chart below shows, when this gets above 65%, it signals a potential shift to a stronger trending market. For example, we saw this above 65% for much of the bull market of 2021. Once this broke beneath 65% in late 2021, it was a warning sign of potential trouble brewing. High beta is doing better. We saw leadership from things like utilities, healthcare, and staples this time a year ago. In other words, the defensive part of the market. Today we are seeing those groups underperform, with high-beta names doing well, another clue that this rally is on better footing. So let’s sum it up like this, you don’t want the defensive stuff leading to a proper healthy bull market. The Golden Cross Lastly, a rare technical development took place last week on the S&P 500, as the 50-day moving average moved above the slower-trending 200-day moving average. This development is known as a “Golden Cross,” which has tended to resolve bullishly for stocks. Since 1950, there have been 36 other Golden Crosses on the S&P 500 and the future returns have been strong, with the S&P 500 higher a year later nearly 78% of the time and up 10.7% on average, with a median return of close to 13%. The bottom line is that this is another sign that things appear to be improving more than anytime we saw last year. Taking it a step further, historically, this Golden Cross took place nearly 13% away from all-time highs. We looked, and when Golden Crosses happened more than 10% or more away from new highs, the future returns got better. Higher a year later, 15 out of 16 times (93.8%) and up a very solid 15.7% on average is something most bulls would likely take, I’m sure. Let’s be clear, after this huge start to the year, and we wouldn’t be surprised at all if we saw some type of weakness or consolidation in February. That would be perfectly normal action after the run we’ve seen, but the bigger picture, we see many clues that this looks like more than a bear market rally, and continued strength in stocks in 2023 is potentially likely.
Do Stocks Want the Eagles or Chiefs to Win? Posted on February 8, 2023 “Baseball is 90% mental, the other half physical.” Yogi Berra First things first, don’t ever invest based on who wins the Super Bowl. Or the coin toss, or how bad the refs will be, etc. With that out of the way, it is Super Bowl season and that means it is time to talk about the always-popular Super Bowl Indicator! The Super Bowl Indicator suggests stocks rise for the full year when the Super Bowl winner has come from the original National Football League (now the NFC), but when an original American Football League (now the AFC) team has won, stocks fall. Of course, this is totally random, but it turns out that when looking at the previous 56 Super Bowls, stocks do better when an NFC team wins the big game. But as Yogi playfully told us in the quote above, sometimes things don’t always add up, and investing on this isn’t going to add up. This fun indicator was originally discovered in 1978 by Leonard Kopett, a sportswriter for the New York Times. Up until that point, the indicator had never been wrong. We like to make it a little simpler and break it down by how stocks do when the NFC wins versus the AFC, ignoring the history of the franchises. As our first table shows, the S&P 500 gained 10% on average during the full year when an NFC team won versus up less than 7% with an AFC team won. Now, this totally random indicator isn’t perfect, as the Rams won last year, and stocks had a horrible year. Yet another reason why the Gods should have let my Bengals win that game. I digress… So, it is clear-cut that investors want the Eagles to fly high and win, right? Maybe not. As stocks have gained the full year 10 of the past 11 times when a team from the AFC won the championship. In fact, the only time stocks were lower was in 2015, when the full year ended down -0.7%, so virtually flat. By my math, there have been 56 Super Bowls and 22 different winners. I broke things up by franchise and city. For instance, Baltimore has won three championships, with one from the Colts and two for the Ravens. So I differentiated the two. Then the Colts won one in Indy, so I broke that out as well. Either way, I still don’t see my Bengals on here, but I expect that the change next year in Vegas at the Super Bowl in February 2024. Getting to the two teams in it this year, the Chiefs have won twice and stocks gained 8.5%, about average, while when the Eagles won in 2018, stocks finished lower for the year. Speaking of Philly championships, here was a fun one we shared during the World Series. Turns out, very bad things happened when the City of Brotherly Love won the World Series. I’m talking panics, depressions, recessions, and financial crises. Maybe we shouldn’t be rooting for Philly now? Perhaps investors have been looking at it all wrong though? It might not matter who wins, but by how much they win. I was looking at the data and noted the Bengals lost by only three last year to the Rams, and stocks did poorly. Then I saw that some years with lopsided scores had some great market returns and vice versa. Well, wouldn’t you know it? The larger the size of the win, the better stocks do. (Let’s have another disclosure that nearly everything I’m saying here isn’t in any way, shape, or form related to what stocks actually do, and you shouldn’t use it as such) That’s right, when it is a single-digit win in the Super Bowl, the S&P 500 is up less than 5% on average and higher less than 60% of the time. A double-digit win? Things jump to about 11% and 79%. And wouldn’t you know it, when the final score is three touchdowns or more, the S&P 500 gained 13.6% for the year and is higher about 85% of the time. Here’s a list of all the big blowouts and what happened to stocks those years. Not too bad, huh? Here are ten other takeaways I noticed while slicing and dicing the data: The NFC has won 29 Super Bowls and the AFC 27. The Steelers and Pats have won the most at six. As great as Peyton Manning was, he only won one Super Bowl. His brother won two. The NFC won two in a row and hasn’t won three in a row since the Saints, Packers, and Giants in 2010, 2011, and 2012. The NFC won 13 in a row from 1985 (Bears) until 1997 (Packers). The Bills made the Super Bowl four consecutive years, losing each time. The highest-scoring game was 75 total points in 1995 between the 49ers and Chargers. The lowest-scoring game was only 16 points in 2019 when the Pats beat the Rams. The closest ever was a one-point win for the Giants over the Bills in 1993 (the Scott Norwood game). In 1990 the 49ers beat the Broncos by 45 for the largest win ever. So, there you have it, your complete breakdown for the big game. I’m saying the Eagles, as they have the best offensive and defensive lines. But Mahomes and Chiefs are awesome, and it’ll likely be a great game. In the end, I just hope the refs don’t ruin it with bad calls all against one team like they did in the AFC Championship. Make it an even game for both teams, Zebras! Past performance is not an indication or guarantee of future results.
Refis Rise Wed, Feb 8, 2023 Mortgage rates have come off of recent lows with the 30-year national average from Bankrate.com currently at 6.53%. While rates are not making new lows, those are much more attractive levels than last fall when they peaked well above 7%. On a rolling 3-month basis, the decline in mortgage rates continues to rank as some of the largest since the late 1990s (after the largest increase since the 1990s). Given the alleviation on the rates front, purchase applications have been rebounding. The Mortgage Bankers Association's weekly purchase application index is currently 19.2% above the post-pandemic low put in place in the first week of the year. When rates were rising rapidly, massively stifling demand last year, refinance applications had taken a much larger hit than purchase applications. At the worst levels during the holidays, refinance applications reached the lowest level since May 2000. Since the start of the year, though, refinance applications have surged. Although there is still plenty of lost ground still to make up as applications continue to run below the past two decades' range, the 68% month-over-month increase in applications has been the largest jump since March 2020 when applications doubled. Of all weekly readings since 1990, the current one-month increase ranks in the top 5% of all month-over-month moves on record.
February Monthly Options Expiration Week: DJIA, S&P 500 & NASDAQ Up 12 of Last 17 February’s monthly option expiration week has had a bullish tilt over the past 33 years. Weekly average gains fall in a range of 0.20% from NASDAQ to 0.49% by Russell 2000. Based upon average performance and the number of positive weeks, Russell 2000 has the best track record. Since 2006, February’s monthly expiration week has become more bullish with DJIA, S&P 500 and NASDAQ all advancing 12 times in 17 years. Russell 2000 remains the standout, up 13 of the last 17 with an average weekly gain of 0.94%. Covid-19 impacted performance in 2020 and 2021 and 2022’s bear market took a bite out of the week. On the heels of this week’s weakness, next week could reverse the recent losing streak provided CPI does not disappoint on Valentine’s Day.
