Recap of the First Half and Expectations for the Remainder of 2023

Recap of the First Half and Expectations for the Remainder of 2023

July 06, 2023

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  • Gains of 10-15% more are likely in 2H 2023 for US Equities - Recent broadening out in market breadth has not yet been followed by an equal broadening out in bullish sentiment. Bull markets are not linear. I expect there will be some pullbacks and even a potential shock that might make the scared investor even believe that a move to new lows is in the cards. This is not a bold expectation but rather a reflection of history. Since 1950, the average maximum drawdown for the S&P 500 during a calendar year has been -13.8%, yet positive first halves have historically led to shallower second-half drawdowns.
  • Technology and Industrials are intermediate-term bullish- but likely require some level of digestion/consolidation.
  • Heightened chance of consolidation from late July into September- so gains likely won’t be uninterrupted. Since the first half has been as strong as it was, this lends itself to the possibility of some level of pullback. It is important to keep a close eye out for negative momentum/breadth divergence, complacency/speculation, and sharp increase in Defensive, which tend to occur ahead of market corrections. At present, the Advance / Decline line is showing new highs and the markets should follow:

  • Interest Rates are likely to decline in the weeks/months to come.  Yields have reached resistance and a pullback to test Spring lows looks likely.  The economic indicators in the form of last week’s ISM number were clearly showing a slowdown, and with this rates should be tempered.
  • History says October 2022 should have been the low- I will insert a table from Thomas Lee of FundStrat below that give the reasons I have been talking about all year as the breadcrumbs continue in their consistent trail to higher market prices:

Let’s review the positives which have kicked in over the last seven weeks since mid-May:

  • Rallies have become more broad-based: Other than the Magnificent Seven, Industrials have all shown strong outperformance. Also, the banking issues have continued to trace their bottom and a lack of additional banking failures has quieted the fear of a larger financial issue.
  • Cycles suggested a late Spring bottom- May/June: My weekly Cycle composite has turned up sharply right on schedule - Following 3 out of 5 down months for Equal-weighted S&P 500, this was precisely when SPX began to broaden out. Also, as seen in Ari Wald’s Presidential Cycle, the advance is continuing right on schedule:

Warning Signs to Look For to Think Market Correction Will Happen (Most of these are Absent Now)

  • Evidence of speculation and complacency - While a few investor sentiment polls have gotten more optimistic, these are not yet at levels of complacency/speculation that have resulted in prior market downturns.
  • Negative momentum/breadth divergence - When fewer and fewer stocks are participating in rallies, this has served as a warning - see early 2020, as well as 2021, as examples.
  • Seasonality concerns - US stocks are now leaving the best two quarters of the entire four-year cycle.  While Pre-election years as a whole tend to be bullish, the back half of 2023 could show more volatility.
  • Trend deterioration in key market sectors like Technology and Financials: If/when these sectors start to break existing uptrends, markets can face possible headwinds.
  • Overbought market conditions on weekly, monthly basis – While some investors have remarked that US Equities are overbought, this has mainly only been seen in NASDAQ 100, and not DJIA, nor weekly or monthly charts of Equal-weighted S&P 500.

I want to end by showing what has happened historically in 1982, 2003, and 2009, the instances that I feel had an internal market shock comparable to what we have been going through. Please remember, we recovered from all of these market bear cycles. It would be customary to expect the same this time even though the media would choose to make you believe otherwise:

In the above picture, remember, much like Fed Chairman Powell, Volker taked about ending inflation and stocks went almost to new all-time highs.

Markets absorbed the “Tech Wreck” and charged back in 2003 after a brutal 2000-2002.

Given the lingering effect of the Great Financial Crisis of 07-09, the recovery in 2009 was believed by few yet the fear of missing out eventually kicked in as the problems ceased.

The ultimate disposition of the current market still seems to be dependent on the Fed’s opinion on how best to deal with inflation yet not extinguishing corporate earnings in the process. Today’s issue that is hot on press is second quarter earnings. To give a preemptive evaluation of what is expected in the way of earnings, I have chosen to segregate overall S&P 500 earnings expectations as overall expectations and overall ex-energy. As can be seen, it appears that the recession in earnings may be ending in which case overall earnings could be prepared to recover:

The second half of July will begin to show us the answer to this unknown. Stay tuned!

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