The first quarter of 2023 stands in stark contrast to the lived experience of 2022. Last year, stocks were ravaged by a valuation-led bear market, bonds had their worst year in memory, and inflation cut into already poor nominal returns. We’re only three months in, but the growth-oriented NASDAQ has already jumped more than 16%, the S&P 500 is up 7%, and bond prices are rising. So is the bear market firmly in the rearview mirror?

US Equities

Each month we take a top-down look at the US financial markets and ask ourselves: Is this a time to buying stocks and increasing our exposure to risk? Or are we better served looking for stocks to sell and finding alternative places to invest?

For most of this year, we’ve been reluctant to answer that question with any conviction. On one hand, indexes are well off their October lows, and the rally has lasted longer and risen further than what is typically seen during bear market rallies. On the other hand, the largest US stock indexes remain stuck below key overhead resistance. And while the list of stocks hitting new 52 week lows peaked last summer, we’ve yet to see a resurgence in the list of stocks setting new highs.

The S&P 500 is trying to get through the 4100-4200 level for the fifth time. This has been our line in the sand all year, and there’s no reason to change that approach now. It’s the 161.8% retracement from the 2020 decline, and it also marked a key low early last year, before the bear market really got going. It’s been resistance for 10 months.

If the S&P is above its February highs, we’ll have much more confidence that this is indeed a new bull market.

The same goes for the NASDAQ. The resistance area we’re watching here is from 11800-12200. These aren’t just numbers we’re pulling out of a hat – 12000 is the 161.8% Fibonacci retracement from the entire COVID selloff. The market respects these Fib levels, so we do, too.

But it’s not just weird rabbit math that has us watching that level. It’s also where growth stocks peaked relative to value. In September 2020, growth stocks – which dominate the NASDAQ – ended a near 15-year run of outperformance relative to value.

Another strong week like the last, and both of those indexes will be above our key levels. In that scenario, where could prove our bullish thesis wrong? Weak breadth.

Most stocks have lagged index returns so far this year, and by a wide margin. The equally weighted S&P 500 has underperformed the cap weighted index by 6% since mid-January.

That’s not entirely unusual. It just means the biggest stocks (which all happen to be growth stocks) are rising faster than smaller ones, and we already knew that growth was driving this year’s returns. Outside of growth names, though, the trends are far from awe-inspiring. The NYSE Composite was setting new 3-month lows just a few short weeks ago, and momentum is in a bearish range.

But a lack of upside participation is different from outright negative leadership. Last month, we lamented the weakness in the Dow Jones Industrial Average and said prices needed to get back above 33000 in a hurry. They did just that:

The Russell 2000 tested its bear market lows. But it held those lows.

We favor a neutral approach to equities unless the S&P 500 is above 4200 and the NASDAQ has comfortably cleared 12200. In that scenario we need to be positioned for higher stock prices. That doesn’t mean we need to be indiscriminately buying everything we see – we still want to be selective. But unless the situation in value deteriorates further, there just isn’t much technical evidence to support a bearish approach.