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Stocks Surge To Start 2023. Is 2023 Off To The Races?

The S&P 500 gained 1.62% this week with Friday's close at 4,136.48. Friday's weekly close is the highest weekly close since August of 2022.

The index has now closed higher four of the last five weeks and has gained 7.73% over that time period. In our Update from 1/1/2023 we wrote:

"We always marvel about how everything can change on a dime for what seems to be nothing more than a change in calendar year."

Well, we limped across the finish line to end 2022 so it's perhaps no surprise that we came out sprinting like mad here in 2023.

If the narrative coming into the week was "Let the retest of the ~4,100 level begin!" then the retest is off to a pretty good start.

The S&P 500 traded mostly negative to start the week but then roared to the upside after hearing from the Fed on Wednesday (click here). The index went from Wednesday's pre-press conference low at 4,037.20 to Thursday's weekly high at 4,195.44, a gain of nearly 4% in a little more than one trading day...resistance at ~4,100 be damned.

Friday's strong jobs report (click here) then threw a bit of cold water on the rally as apparently weak economic data is good news and strong economic data is bad news. The S&P 500 fell -1.04% on Friday, which left a hint of "resistance" at the ~4,200 region. The narrative here is the idea that given how strong the labor market remains the Fed will need to do more in order to truly defeat inflation. This fuels the "higher for longer" policy stance that runs counter to the idea that the Fed's hiking cycle is done in a month.

Visually speaking, should the index trade back down into the shaded red region on the chart below (say at and around ~4,080-4,100) and then move back above the ~4,200 region by week end, that would be a picture-perfect breakout to the upside. Alternatively, should the S&P 500 trade below the 4,100 region early next week and then stay there by closing the week below the 4,100 level, that would be an ominous sign indicative of a "false breakout".

Given how strong and resilient the price action has been thus far here in 2023 there's no reason to believe the "false breakout" scenario is most likely.

That said, it feels like the "false breakout" is what's happening, the rally to start the year feels "too good to be true" given the macroeconomic landscape, like it's one giant "bull trap", but that's why feelings have no seat at the roundtable of decision-making. For now, Friday's downturn is nothing more than a healthy "throwback".

While Powell didn't take an overly hawkish "whatever it takes" stance at his press conference on Wednesday (hence why the S&P 500 ripped higher in our opinion), Friday's blowout jobs report did move interest rate expectations across market participants in the federal funds futures space. The market now sees a good chance of an additional 0.25% rate hike after March, leaving the terminal rate at 5.00%-5.25%. The market is still pricing in rate cuts the final two months of the year, and given Powell's tone on Wednesday we find that rather difficult to explain.

Technology stocks continue to be the main driver of the S&P 500's upside. The S&P 500 technology sector (SPT) gained 3.75% this week and has now increased five weeks in a row, gaining 13.95% in the process.

This is essentially the third time SPT has gained roughly 14% over five weeks since the start of 2022. The two prior instances that occurred in August and November of last year preceded substantial downturns for SPT. In other words, SPT has never had a problem skyrocketing to the upside, or getting high. It's had a problem then staying high. Therefore, we'll know if "this time is different" over the weeks ahead if SPT can stay high.

In terms of sectors, the price action was again "risk-on" this week. Communication services was the top performing sector, gaining 5.26%. Meta Platforms, Inc. (META) was the big winner there this week, roaring higher by 22.93% (click here). Technology and consumer discretionary were in the silver and bronze spots this week, rising by 3.71% and 2.34%. The laggards this week were once again the energy sector and the defensive areas of the market with the energy, utilities, and health care sectors all finishing the week in the red.

We write about sectors often but we rarely write about different styles of the market, however the price action in January for the "value" style was too good to ignore.

The SPDR S&P 500 Value ETF (SPYV) closed the month of January at a fresh all-time high. The SPDR S&P 400 Mid Cap Value ETF (MDYV) and the SPDR S&P 600 Small Cap Value ETF (SLYV) both closed January at a fresh all-time high. There's a trend here: market participants have a salacious appetite for "value" stocks across any and all market capitalizations.

The monthly chart of MDYV now sports a gorgeous bullish breakout. This isn't exactly something we expect to see during "bear markets".

As for the week ahead, we have a light week on the economic data front. Earnings season will continue to roll along but it's the perfect week for the S&P 500 to take a rest. Remember, prices don't move linearly forever and we've been on a one-way train to the north for a few weeks now. We'd like to see the S&P 500 consolidate between ~4,080-4,200 and rebuild the energy for another push higher. Ideally, past "resistance" will become future "support" should the index be able to sustain above the ~4,080 level over the week(s) ahead. Hopefully a boring week awaits!

S&P 500 Primary Trend - Neutral 

The S&P 500 finished the month of January on Tuesday. The index gained 6.17% in January, recovering almost all of its December decline.

Based on January's strength our work now labels the primary trend for the S&P 500 as trendless, or "neutral". During "neutral" climates long-term investors are best served investing in a balanced manner, generally speaking. 

Our mantra for 2023 has been for long-term investors to allocate as if the worst is yet to come while being prepared in the event the best is right around the corner. January's pivot to the upside combined with a strong start to February suggest the best might actually be right around the corner. As we wrote last week, it certainly doesn't feel like it but that's the way all lasting market bottoms feel.

The S&P 500 closed January back above its 12-month simple moving average (12MA). It also finished January with positive momentum across the trailing 1-, 3- and 6-month time periods. About all that's left for the S&P 500's primary trend to be labeled as up or "bullish" is for the index to close the month of February above the ~4,130 level. It feels like every month has been a pivotal month of late and the price action in February is no different. Can the S&P 500 stay high or get even higher? If so, the primary trend will reassert itself as up or "bullish".

There's a bevy of quantifiable studies that would suggest January's move to the upside is just the beginning (i.e., the S&P 500 is onward and upward from here over the remainder of 2023). We share these studies not to suggest further upside is guaranteed over the remainder of 2023, but instead in an effort to dispel a "bearish" narrative that the upside we've seen the last four months can't continue throughout the remainder of 2023.

For example, the S&P 500 closed the month of January with trailing 4-month returns of 10% or more while also having negative trailing 12-month returns. We're essentially honing in on strong 4-month rallies within the context of a meaningfully negative trailing calendar year.

There have been nine prior instances of this 4-month price thrust and in all nine instances the S&P 500 was then off to the races to the upside.

The index has never closed lower across almost every time period referenced on the table and the average returns the S&P 500 recorded over those time periods are well above norm. This is easily one of the most "bullish" studies we've ever encountered and the only strike against it - and it's a big one - is that it's only nine prior instances. For example, we all know someone who has hit nine free throws in a row before, but they're still probably 50% free throw shooters if they took 100 free throws.

We can also identify all calendar years that have started off gangbusters to the upside like 2023. The table below lists all calendar years where the S&P 500 reached 7.5% or more year-to-date returns at some point during the month of February while also closing the month of February below its all-time high monthly close (we think that's a safe assumption here in February...).

This identifies eight prior calendar years, and the S&P 500's returns over the forward six and eight months have closed higher across all but one instance while the index's forward ten- and twelve-month returns have never closed lower.

In other words, a strong start to a calendar year like we've seen here in 2023 has never not added more to the upside the remaining ten months of the calendar year and the subsequent twelve months. As they say, strength begets strength. Eager buying interest in the present is a derivative of the expectation for higher prices into the future.

As always, our studies can't be used in isolation to predict where the S&P 500 is headed next. It doesn't take us more than a few minutes to produce the tables shared above, and if a few minutes of work was analogous to having a crystal ball then we'd make our clients and ourselves a lot more money. The game is just not that easy.

What these tables do is to help us find dispassion and conviction in the idea that we have no idea what lies ahead. At the moment it's easy to believe we're doomed, it's much harder to have the faith that the Fed has nailed it, a soft landing is on deck, and the S&P 500's "bear market" is over.

These studies help us avoid having an overly negative bias as to what lies ahead because "unless this time is different" the price action in a vacuum suggests we're headed much, much higher here in 2023.

We can all only hope!

Happy Sunday!

Steve & Rick

This material is being provided for client and prospective client informational purposes only. This commentary represents the current market views of the author, and Nerad + Deppe Wealth Management (NDWM, LLC) in general, and there is no guarantee that any forecasts made will come to pass. Due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in any forward-looking statements. Neither the information nor the opinions expressed herein constitutes an offer or solicitation to buy or sell any specific security, or to make any investment decisions. The opinions are based on market conditions as of the date of publication and are subject to change. All data is sourced to stooq.com and stockcharts.com. No obligation is undertaken to update any information, data or material contained herein. Past performance is not indicative of future results. Any specific security or strategy is subject to a unique due diligence process, and not all diligence is executed in the same manner. All investments are subject to a degree of risk, and alternative investments and strategies are subject to a set of unique risks. No level of due diligence mitigates all risk, and does not eliminate market risk, failure, default, or fraud. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed herein. The commentary may utilize index returns, and you cannot invest directly into an index without incurring fees and expenses of investment in a security or other instrument. In addition, performance does not account other factors that would impact actual trading, including but not limited to account fees, custody, and advisory or management fees, as applicable. All of these fees and expenses would reduce the rate of return on investment. The content may include links to third party sites that are not affiliated with NDWM, LLC. While we believe the materials to be reliable, we have not independently verified the accuracy of the contents of the website, and therefore can't attest to the accuracy of any data, statements, or opinions.

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