The Bull Thread

Some Improvement in Claims
Thu, Apr 27, 2023

The latest week's jobless claims data fell down to 230K from the previous week's upward revision to 246K. That 16K decline was the largest week over week drop since the first week of the month and brings claims back down to the low end of the past couple of months' range.



Before seasonal adjustment, claims were lower reaching 225.84K. That is roughly inline with the comparable weeks of last year and the few years prior to the pandemic. As shown in the second chart below, a drop in the current week of the year has very much been the norm historically. As for 2023 as a whole, unadjusted claims have remained relatively flat following the steep seasonal decline in the first weeks of the year. The potential for further seasonal strength will remain in place for the next few weeks as claims historically have reached a seasonal low in late May.



Like initial claims, seasonally adjusted continuing claims also surprised with a decline this week. Continuing claims totaled 1.858 million in the most recent week, down from 1.865 million and better than the expected increase to 1.87 million. Albeit the latest week's reading was surprisingly strong, the indicator's uptrend remains firmly in place which as we noted in last week's Bespoke Report, the overall rise in continuing claims has resembled other recessionary periods.

 

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%.

 

Four More Reasons the Bulls Are Smiling
Posted on May 17, 2023

Last month, I wrote about some bullish events taking place in Three More Bullish Signals The Bears Don’t Want To See, and it was a very popular blog. Well, today, I’ll take it one more step and list four new reasons the bulls will continue to smile.

We think the Fed is likely done hiking
With inflation coming down quickly, we are in the camp that the Fed is likely done hiking rates. You can read more about what Sonu had to say about the recent inflation data here.

One clear sign the Fed is indeed done is that the upper limit of the Fed Funds rate is now up to 5.25%, which is finally more than year-over-year CPI, which is 4.9%. As you can see below, the previous eight hiking cycles needed this ingredient before the Fed was done, and we are now there.



What if they are indeed done? I wrote about this in The Last Hike?, but the bottom line is stocks tend to do quite well, higher a year later eight out of 10 times and up a very impressive 14.3% on average. I keep hearing on tv how it is bearish once they stop hiking, but the data just doesn’t show that.



Stocks aren’t loved
We’ve noted many times in the past six months that one reason to expect higher equity prices was that the masses keep betting on lower prices. This matters as the crowd is rarely right looking back at history. I wrote about this more in Is Anyone Bullish Part 2.

Well, we have more data to support this in the form of a recent Gallup poll that asked what the best long-term investment would be. Wouldn’t you know it, stocks/mutual funds came in at the lowest level since 2011! Given how poorly stocks did last year and the constant barrage of negative news, maybe this isn’t a surprise, but from a contrarian point of view, this is another reason to think the path is higher for stocks.



Now is weak, but the future looks better
Some of the business and economic surveys we’ve seen lately have been weak, that is true, but what has our attention is that the future is looking better.

The New York Fed does some great work here, and a recent survey of Business Leaders showed that expectations for business activity six months from now were at the highest level since September 2022.

I find this worthwhile, as they focus on the New York and New Jersey area, in other words, the heart of the banking world. If most of these business leaders see better times coming, that is something the bulls should embrace.



Positive year-over-year … finally
Here’s a big one that just happened, and it has many bulls smiling.

The S&P 500 was negative year-over-year on a monthly basis for 12 consecutive months, but it just ended positive at the end of April (mainly thanks to the 9% drop in April 2022 dropping off). What does this mean? Well, we looked, and when previous long streaks ended, historically it suggested the bulls would start to have some fun.

As you can see below, the S&P 500 has never been lower a year later, higher eight out of eight times, with a very impressive 15.3% average return. Yes, there are many things to watch, but when you layer this one with the other bullish signals we’ve noted so far in 2023, we continue to hold an overweight to equites in our Carson House Views.

 

Russell 2000 Best Week Before Memorial Day, Up 75% of the Time

Top image curtesy of https://www.asomf.org/the-history-of-memorial-day/

In the table we went back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday. The Friday before Memorial has become getaway day on The Street and volume can be diminished and trading uninspired. However, this has not stopped the market from making some sizable moves for the week. Last year, DJIA, S&P 500, NASDAQ, and Russell 2000 all jumped over 6%.

DJIA is the weakest in the week before Memorial Day up 27 of the past 52 years and a paltry 0.13% average gain. S&P is a bit better, up 63.5% of the time with an average gain of 0.32%. NASDAQ is up 65.4% of the time, averaging a gain of 0.41%. But the Russell 2000 small cap index takes the lead ahead of the official kick-off to summer up 75.0% of the time with an average gain of 0.73%.

 

Thursday Best Day Ahead of Memorial Day

Friday before Memorial Day has become getaway day on The Street and trading can be lackluster with light volume. Dow is down 12 of 23, averaging a loss of –0.07%. S&P has a slightly better record, but still averages a loss of –0.02%. NASDAQ is up 14 of 23 and averages a modest 0.10% gain. Russell 2000 has been down 11 and up 11 (no change in 2013), averaging a 0.16% gain on Friday.

Average performance on Wednesday and Thursday has generally been better, but volume is often diminished and trading uninspired. Thursday posts the best numbers across the board led by Russell 2000, up 17 of 23 with an average gain of 0.49%. DJIA and S&P 500 have been up 15 of the last 23 with average gains of 0.16% and 0.23% respectively.

 

Why a Strong First 100 Days Is a Good Thing
Posted on May 25, 2023

“It’s not how you start the season, it’s how you finish.” -Albert Pujols, 11-time All Star professional baseball player

Can you believe it, today is the 100th trading day of the year. In the face of mounting worries about the economy, Fed policy, stubborn inflation, an earnings recession, the manufacturing recession, the war in Ukraine, poor market breadth, signing Joe Burrow to a long-term NFL deal, and more, stocks have had a really strong start to 2023. Ok, that Joe Burrow part is more of a personal worry, but the man needs to be paid and we need to keep him in Bengal stripes, so it is a worry of mine in 2023.

So, what exactly does a good start to a year as of Day 100 mean? Well, the 7.2% gain as of yesterday would be the best start to a year since 2021 with 2019 and 2017 before that. In other words, recently strong starts have meant continued gains for the bulls out there who recall those fun years.

Looking at all the years to gain at least 7% by Day 100 showed that the rest of the year was higher by 9.4% on average and up 88.5% of the time. Anyone up for another 10% from here? Unless you are a permabear, I bet most readers would be ok with that. Lastly, the full year has never closed the year lower when up more than 7% on Day 100. Yes, 1987 is in here, so we know that stocks can indeed go lower from here, but to have a red year in 2023 would truly be rare.



That isn’t the only good news though. In fact, here are two more recent occurrences that should bode well for continued strong returns from stocks this year.

First up, the S&P 500 hasn’t made a new 52-week low since the mid-October lows last year. That is more than seven months without a new low and history would say that a move right back beneath those October lows would be quite rare. As you can see from the chart below, usually this is a sign that ‘the lows’ indeed are in and in many cases strong continued gains were possible.



Here are all the instances of a new 52-week low and then seven months in a row without a new low. A year later? Stocks were up 12.6% on average and higher 86.4% of the time. Looking at things over the past 50 years and only twice (out of 14 times) did stocks go on to make new lows after seven months without a new 52-week low. Those were in 2002 (and the vicious three-year bubble bursting bear market) and then right ahead of a 100-year pandemic. Let’s hope now isn’t like those two and we don’t think it is. The other 12 times the lows were indeed in place. We remain in the camp that the lows from October are it and the bear market ended then. We’ve been saying that since late last year and many more are coming around to this opinion now. This study does little to change our views here.



Lastly, we’ve seen strong leadership from large cap technology this year, after a horrible year last year it should be noted. This is the lifeblood of bull markets, changing leadership and we have seen it this year. Turning to the NASDAQ-100, it recently made a new 52-week high for the first time since before Thanksgiving in 2021 …. Nearly 18 full months! As bad as that was, the good news is when it goes at least six months without a new 52-week high and finally makes one (like last week), the future returns can be quite strong. As we show below, the NASDAQ-100 was higher a year later 14 out of 14 times and up 16.8% on average along the way. We don’t expect this to be 14 out of 15 this time next year is all I will say.



With all of that, I must ask you, why are you even reading this right now? We are right before a holiday weekend and I hope you can get a break, eat some good food, and spend time with family and friends this Memorial Day weekend. The stock market is having a nice year, bonds are doing ok, or at least way better than last year, the economy is firming, the Fed is likely done hiking, and the Bengals are inching closer to signing Joey B. Have a great weekend, everyone!

 

DJIA Up Nine of Last Ten Years on June’s First Trading Day

According to the Stock Trader’s Almanac 2023 (page 90), the first trading day of June is the fifth weakest first trading day of all twelve months with DJIA gaining just 442.36 total points since 1998. Over the past 28 years, DJIA’s first trading day of June has produced gains 74.1% of the time with an average gain of 0.04% in all years. Sizable losses in 2002, 2011 and 2012 limit overall performance. S&P 500 has advanced 60.7% of the time. NASDAQ has been slightly weaker at 53.6%. Russell 2000 has advanced 64.3% with the best average performance of 0.20%. Following three straight losses from 2010 to 2012, DJIA has advanced on nine of the last ten first trading days of June.

 

NASDAQ and Russell 2000 Lead June Pre-Election Strength

Over the last 21 years, June has been a rather lackluster month. DJIA, S&P 500 and Russell 1000 have all recorded average losses in the month. Russell 2000 has fared better with a modest average gain. Historically the month has opened respectably, advancing on the first and second trading days.

From there the market then drifted sideways and lower into negative territory just ahead of mid-month. Here the market rallied to create a nice mid-month bulge that quickly evaporated and returned to losses. The brisk, post, mid-month drop is typically followed by a month end rally led by technology and small caps.

Historical performance in pre-election years has been much stronger with all five indexes finishing with average gains. June’s overall pattern in pre-election is similar to the last 21-years pattern with a brief, shallow pullback after a solid start.

In pre-election years the mid-month rally has been much more robust beginning around the sixth trading day and lasting until the fifteenth. Followed by another modest retreat and rally into the end of Q2.

 

June Better in Pre-Election Years

Since 1971 June has shone brighter on NASDAQ stocks as a rule ranking eighth best with an 0.8% average gain, up 29 of 52 years. This contributes to NASDAQ’s “Best 8 Months” which ends in June. Small caps also fare well in June. Russell 2000 has averaged 0.6% in June since 1979 advancing 63.6% of the time.

June ranks near the bottom on the Dow Jones Industrials just above September since 1950 with an average loss of 0.2%. S&P 500 performs similarly poorly, ranking ninth, but essentially flat (0.02% average gain).

Despite being much stronger S&P 500 pre-election year June ranks fifth best. For the rest it is just sixth best. Average monthly gains in pre-election year June range from DJIA 1.1% to a respectable 2.4% for NASDAQ. Russell 2000 has been the most consistently bullish in pre-election years, up 8 of the last 11 (72.7% of the time).

 

Welcome to the New Bull Market
Posted on June 6, 2023

“If you torture numbers enough, they will tell you anything.” -Yogi Berra, Yankee great and Hall of Fame catcher

Don’t shoot the messenger, but historically, it is widely considered a new bull market once stocks are more than 20% off their bear market lows. This is similar to when stocks are down 20% they are in a bear market. Well, the S&P 500 is less than one percent away from this 20% threshold, so get ready to hear a lot about it when it eventually happens.

I’m not crazy about this concept, as we’ve been in the camp that the bear market ended in October for months now (we started to say it in late October, getting some really odd looks I might add), meaning a new bull market has been here for a while. Take another look at the great Yogi quote above, as someone can get whatever they want probably when talking about bear and bull markets.

None the less, what exactly does a 20% move higher off a bear market low really mean? The good news is future returns are quite strong.
We found 13 times that stocks soared at least 20% off a 52-week low and 10 times the lows were indeed in and not violated. The only times it didn’t work? Twice during the tech bubble implosion and once during the Financial Crisis. In other words, some of the truly worst times to be invested in stocks. But the other 10 times, once there was a 20% gain, the lows were in and in most cases, higher prices were soon coming. This chart does a nice job of showing this concept, with the red dots the times new lows were still yet to come after a 20% bounce.



Here’s a table with all the breakdowns. A year later stocks were down only once and that was during the 2001/2002 bear market, with the average gain a year after a 20% bounce at a very impressive 17.7%. It is worth noting that the one- and three-month returns aren’t anything special, probably because some type of consolidation would be expected after surges higher, but six months and a year later are quite strong.



As we’ve been saying this full year, we continue to expect stocks to do well this year and the upward move is firmly in place and studies like this do little to change our opinion.

 

Why Low Volatility Isn’t Bearish
Posted on June 8, 2023

“There is no such thing as average when it comes to the stock market or investing.” -Ryan Detrick

You might have heard by now, but the CBOE Volatility Index (better known as the VIX) made a new 52-week low earlier this week and closed beneath 14 for the first time in more than three years. This has many in the financial media clamoring that ‘the VIX is low and this is bearish’.

They have been telling us (incorrectly) that only five stocks have been going up and this was bearish, that a recession was right around the corner, that the yield curve being inverted was bearish, that M2 money supply YoY tanking was bearish, and now we have the VIX being low is bearish. We’ve disagreed with all of these worries and now we take issue with a low VIX as being bearish.

What exactly is the VIX you ask? I’d suggest reading this summary from Investopedia for a full explanation, but it is simply how much option players are willing to pay up for potential volatility over the coming 30 days. If they sense volatility, they will pay up for insurance. What you might know is that when the VIX is high (say above 30), that means the market tends to be more volatile and likely in a bearish phase. Versus a low VIX (say sub 15) historically has lead to some really nice bull markets and small amounts of volatility.

Back to your regularly scheduled blog now.

The last time the VIX went this long above 14 was for more than five years, ending in August 2012. You know what happened next that time? The S&P 500 added more than 18% the following 12 months. Yes, this is a sample size of one, but I think it shows that a VIX sub 14 by itself isn’t the end of the world.

One of the key concepts around volatility is trends can last for years. What I mean by this is for years the VIX can be high and for years it can be low. Since 1990, the average VIX was 19.7, but it rarely trades around that average. Take another look at the quote I’ve used many times above, as averages aren’t so average.
This chart is one I’ve used for years now and I think we could be on the cusp of another low volatility regime. The red areas are times the VIX was consistently above 20, while the yellow were beneath 20. What you also need to know is those red periods usually took place during bear markets and very volatile markets, while the yellow periods were hallmarked by low volatility and higher equity prices. Are we about to enter a new period of lower volatility? No one of course knows, but if this is about to happen (which is my vote), it is another reason to think that higher equity prices (our base case as we remain overweight equities in our Carson House Views) will be coming.



Lastly, I’ll leave you on this potentially bullish point. We like to use relative ratios to get a feel for how one asset is going versus to another. We always want to be in assets or sectors that are showing relative strength, while avoiding areas that are weak.

Well, stocks just broke out to new highs relative to bonds once again. After a period of consolidation during the bear market last year, now we have stocks firmly in the driver seat relative to bonds. This is another reason we remain overweight stocks currently and continue to expect stocks to do better than bonds going forward.

 

A New Bull Market: What’s Driving It?
Posted on June 9, 2023

The S&P 500 finally closed 20% above its October 12th (2022) closing low. This puts the index in “official” bull market territory.

Of course, if you had been reading or listening to Ryan on our Facts vs Feelings podcast, you’d have heard him say that October 12th was the low. He actually wrote a piece titled “Why Stocks Likely Just Bottomed” on October 19th!

The S&P 500 Index fell 25% from its peak on January 3rd, 2022 through October 12th. The subsequent 20% gain still puts it 10% below the prior peak. This does get to “math of volatility”. The index would need to gain 33% from its low to regain that level. This is a reason why it’s always better to lose less, is because you need to gain less to get back to even.



So, what’s next? The good news is that future returns are strong. In his latest piece, Ryan wrote that out of 13 times when stocks rose 20% off a 52-week low, 10 of those times the lows were not violated. The average return 12 months later was close to 18%. The only time we didn’t see a gain was in the 2001-2002 bear market.



Digging into the return drivers
It’s interesting to look at what’s been driving returns over the past year. This can help us think about what may lie ahead. The question was prompted by our friend, Sam Ro’s latest piece on the bull market breakout. He wrote that earnings haven’t been as bad as expected. More importantly, prospects have actually been improving.

The chart below shows earnings expectations for the S&P 500 over the next 12 months. You can see how it rose in the first half of 2022, before collapsing over the second half of the year. The collapse continued into January of this year. But since then, earnings expectations have steadily risen. In fact, they’ve accelerated higher since mid-April, after the last earnings season started. Currently, they’re higher than where we started the year.



Backing up a bit: we can break apart the price return of a stock (or index) into two components:

• Earnings growth
• Valuation multiple growth

I decomposed annual S&P 500 returns from 2020 – 2023 (through June 8th) into these two components. The chart below shows how these added up to the total return for each year. It also includes:

• The bear market pullback from January 3rd, 2022, through October 12th, 2022
• And the 20% rally from the low through June 8th, 2023

You can see how multiple changes have dominated the swing in returns.

The notable exception is 2021, when the S&P 500 return was propelled by earnings growth. In contrast, the 2022 pullback was entirely attributed to multiple contraction. Earnings made a positive contribution in 2022.

Now, multiple contraction is not surprising given the rapid change in rates, as the Federal Reserve (Fed) looked to get on top of inflation. However, they are close to the end of rate hikes, and so that’s no longer a big drag on multiples.

Consequently, multiple growth has pulled the index higher this year. You can see how multiple contraction basically drove the pullback in the Index during the bear market, through the low. But since then, multiples have expanded, pretty much driving the 20% gain.

Here’s a more dynamic picture of the S&P 500’s cumulative price return action from January 3rd, 2022, through June 8th, 2023. The chart also shows the contribution from earnings and multiple growth. As you can see, earnings have been fairly steady, rising 4% over the entire period. However, the swing in multiples is what drove the price return volatility.

Multiples contracted by 14%, and when combined with 4% earnings growth, you experienced the index return of -10%.

What next?
As I pointed out above, the problem for stocks last year was multiple contraction, which was driven by a rapid surge in interest rates.

The good news is that we’re probably close to end of rate hikes. The Fed may go ahead with just one more rate hike (in July), which is not much within the context of the 5%-point increase in rates that they implemented over the past year.

Our view is that rates are likely to remain where they are for a while. But rates are unlikely to rise from 5% to 10%, or even 7%, unless we get another major inflation shock.

This means a major obstacle that hindered stocks last year is dissipating. The removal of this headwind is yet another positive factor for stocks as we look ahead into the second half of the year.

 

Lucky Seven for the Nasdaq
Mon, Jun 12, 2023

It wasn't by much, but the Nasdaq rallied 0.14% last week and extended its streak of weekly gains to seven. That's the longest streak of weekly gains for the index since November 2019. To find a longer streak, you have to go back to February 2018 when the Nasdaq had ten straight weeks of gains. As shown in the chart below, since the Financial Crisis lows in May 2019, there have now been seven different periods where the Nasdaq rallied for at least seven weeks in the row.



The chart below shows the performance of the Nasdaq since the start of 2009, and we have included red dots to show each time the Nasdaq was up for seven straight weeks (for each period, the dot represents the Friday of the seventh positive week). While there were two periods (2010 and 2012) where the Nasdaq clearly experienced a moderate pullback fairly quickly after its seventh positive week, following the others, it doesn't appear as though the rally was tripped up at all.



Looking at forward performance after a seven-week winning streak in more detail, the chart below shows the maximum drawdown for the S&P 500 in the three months after seven straight weeks of gains in the Nasdaq. Here again, it's easy to see the large declines that followed the 2010 and 2012 streaks, but in the four other streaks, the S&P 500 never even pulled back 4%. In two of those periods, the maximum decline never exceeded 0.41%. For reference, the average 'max drawdown' over any three-month period for the Nasdaq since the start of 2009 has been 5.33%

 

Why Strong Stock Returns on Friday is Bullish
Posted on June 13, 2023

One of the most hated and despised rallies continued last week, with the S&P now up nearly 12% on the year and officially up more than 20% from the October lows. If you’ve been reading or listening to what the Carson Investment Research team has been saying, then you know we’ve been in the camp we’ve been in a new bull market for quite some time now, expecting continued higher prices. None the less, with stocks now officially up 20%, we see others finally coming around. For instance, check out the cover of Barron’s over the weekend. Yeah, we sure weren’t seeing things like that in January, were we?



Sonu and I both wrote blogs last week on stocks being up 20% from the lows and you can read them here and here. Additionally, here’s a Yahoo! Finance hit I did on October 13, the exact day that stocks officially bottomed. I noted many reasons to think better times were coming and fortunately, that is exactly what has happened.

Additionally, here’s the blog I wrote a week after the October lows titled Why Stocks Likely Just Bottomed. Our bullish tilt since late last year wasn’t popular and has been widely mocked by many bears for months and months. We aren’t hearing so much chirping from them now though

One thing we’ve notice lately is buying and strength in stocks later in the week, specifically on Thursday and Friday. We love to see this, as it shows there is confidence to hold stocks over the weekend. Those of us that have done this long enough remember how volatile (and usually bearish) Friday afternoons would be during the Great Financial Crisis (GFC) or during the COVID bear market in February and March of 2020. Even last year during the bear market we saw historically weak returns on Friday.

So, to now see buying and confidence on Thursday and Friday in ’23 are significant changes from what we saw during previous bearish phases and could be another clue that this bull market is indeed healthy and likely has legs left.

This first chart shows just how much better Thursday and Friday are doing than the other days this year. Again, we like to see this late week buying as a clue things are healthy and confident. (For those wondering how we did the annualized return calculations, the average Friday return this year so far has been a gain of 0.40%, so we multiplied that by 252 (the number of trading days per year) to get an annualized return).



Let’s talk specifically about Friday, shall we? As of last week, Friday was up an incredible 101.7% on an annualized basis in ’23. This would come in as the best Friday EVER. Now, let’s be honest, the odds do favor this coming back to earth some over the remaining rest of the year, but overall we are on a great start to this year being one of the best ever for stocks on a Friday.



What does it all mean you ask? In the final table below, I looked at all years that had at least a 55% annualized return on Friday. This was the very best 12 years ever for Friday returns and sure enough, they are also some of the best years overall for stocks. In other words, some of the best years ever also saw strong performance on the last day of the week, further confirming that buying on a Friday is what you tend to see in bullish markets.

We will end on this note, stocks were higher 12 out of 12 times in these years and up a very impressive 24.8% on average, about half of this year’s 12.0% return so far. This could be a subtle clue that as good as this year has been, it could have more in the tank before all is said and done. I did discuss this Friday concept on Yahoo! Finance on Friday.