Is Big Tech Back in the Driver’s Seat?

Do you remember when big tech was the ONLY place to invest?

Let’s rewind to the days before half the world closed its doors. From the end of 2018 to the pre-pandemic peak, the S&P 500 Information Technology Sector rose 65%. The Communication Services Sector, which sported 20% weights to both Alphabet and Facebook, jumped 40%. The S&P 500 itself climbed 35%. Not a bad year for investors, right? So long as they had their money in the right place, that is.

Over that 13 month period, every other sector underperformed the index.

Every market historian knows that the bulk of historical index returns are generated by a handful of names (that’s why we focus so much on identifying relative strength). Rarely, though, has that phenomenon been so readily apparent as it was that year, when more than 80% of sectors lagged the index.

COVID wasn’t the end of that story. In fact, forcing millions of people and their employers to embrace a digital transition was just gasoline on the fire. In the first 8 months of 2020, the Russell 1000 Growth index surged 45% relative to its Value counterpart.

Then came September 2020.

In just 3 days at the start of the month, growth stocks dropped 10%. Value fell only 4%. We couldn’t have known it at the time, but that day would mark the end of growth’s dominance. Value oriented stocks – especially in the Energy and Industrials sectors – have been in the driver’s seat ever since.

Big tech’s trouble couldn’t have started at a more logical place – the same place trouble began more than 20 years ago. Tech’s relative strength peaked exactly at the monthly highs from the internet bubble. Last time, it resulted in an 80% collapse for the sector, and a run of lackluster performance that didn’t reverse until the financial crisis. The question is, will history repeat itself?

The answer may rest on the path of interest rates. Financial assets have benefited from 40 years of falling interest rates since the early 1980s. Not only have lower rates reduced borrowing costs and helped drive economic expansion, they’ve also forced investors out the risk spectrum. An investor that once was happy with a risk-free Treasury yielding 6% hasn’t had that option since the turn of the century. Instead, they’ve had to allocate funds towards riskier asset classes – high yield bonds, real estate, stocks, etc. And because interest rates are a primary component of the discount rate used to estimate the value of most assets, stocks with higher long-term growth expectations have disproportionately benefited.

That 40-year run for rates may be at an end, though. With inflation far above the Federal Reserve’s 2% target, they’ve raised short-term borrowing costs at 9 consecutive meetings since last March. Interest rates across the curve have risen to levels not seen since the Financial Crisis.

Growth stocks felt the consequences in 2022. Information Technology, Communication Services, and Consumer Discretionary (dominated by Amazon and Tesla) were all leaders on the downside. Value and risk-off sectors, meanwhile, held up significantly better.

In 2023, though, the narrative has reversed. Tech, Communications, and Discretionary are each up double digits, while everyone else is in the red.

Interest rates again are largely to blame. The 10-Year Treasury yield has retreated from last year’s highs and is threatening to fall below support. If it does, big tech is set to remain in the driver’s seat.

Besides a resurgence in yields, what’s the biggest risk to this narrative? The ‘why’ of interest rates breaking down.

In the first few months of the year, economists and investors began to believe the Federal Reserve was close to achieving a so-called ‘soft landing’, i.e. controlling inflation without causing a recession. If so, rate hikes would soon be at an end, and investors could be more confident in valuing a growing company’s prospects.

With the failure of Silicon Valley and Signature Bank, though, that soft landing scenario seems unlikely. Deposits are flowing out of banks across the country and into money-market funds, and banks will almost certainly respond by pulling back on credit issuance. Those types of credit crunches often lead to recession.

Markets have responded by pricing in a series of rate cuts by the Fed in the back half of this year, and the prospect of lower rates brings with it all those growth stock tailwinds of the 2010s. While Financials, Industrials, Energy, and Materials sectors have all dropped since SVB’s collapse, Tech, Communications, and Discretionary are doing just fine.

The question is, will Powell & Co. play along? Powell isn’t forecasting cuts this year, and neither are his colleagues. But they don’t sound too confident in a soft landing either. Instead, they continue to point towards the risks of removing restrictive policy too early, lest they repeat the mistakes of the 1970s. Their mandate is to maintain price stability and full employment, and they can’t achieve the latter without first ensuring the former. In other words, Powell’s Fed may not offer the same monetary support that we’ve grown accustomed to during recent recessions.

If that’s the case, it may not matter which sectors are showing relative strength – they’ll all be facing some serious pressure. Bear markets that coincide with recessions often take years to find a bottom. And you’d be hard-pressed to find one that’s bottomed before the recession even began. That’s the crux of the bear case for stocks.

Here’s one final chart to chew on: Tech is back above those monthly, internet bubble highs, and it’s set to challenge the weekly level.

If Information Technology, the biggest sector in the index, is setting new all-time relative highs… well, good luck defending that bear case.

The Weekly Wrap: March 27, 2023

Week in Review

Stocks rebounded last week, rising more than 1%. The NASDAQ Composite continues to be the leader in 2023, up nearly 13% for the year. The Dow Jones Industrial Average, meanwhile, remains in negative territory. Interest rates fell modestly, and the US Dollar had its largest weekly decline since January. Oil prices rose 3.8%, offsetting some of the prior week’s 13% drop. Gold slipped 0.6%, and Bitcoin rose 1.9%.

The Federal Reserve raised its benchmark interest rate for the ninth consecutive meeting last Wednesday. The 0.25% hike was smaller than what most analysts expected prior to the failures of Silicon Valley Bank and Signature Bank, but turmoil in the financial sector was not enough to make the inflation-focused Fed keep rates unchanged. Notably, the FOMC statement, along with the quarterly Summary of Economic projections, implied that rate hikes will soon be in the rearview mirror. Markets are priced for more extreme reversal, including a series of rate cuts by year-end. Federal Reserve Chair Jerome Powell, however, reiterated at his post-meeting press conference that containing inflation was his top priority, and the Fed wouldn’t hesitate to reaccelerate the pace of policy tightening if needed.

Market Internals

Less than half of all S&P 500 stocks are in an uptrend, and that’s true whether you’re looking at them on short, intermediate, or long-term timeframes. Recent weakness has been most pronounced in cyclical sectors – Energy, Materials, Industrials, and Financials. Those sectors were the leaders in 2022. Now they’re the clear laggards.

Trends within the Information Technology sector are the healthiest. Nearly two-thirds of stocks in that sector are above their 100 and 200 day averages. And more than half are above short-term averages. Health Care, Consumer Staples, and Utilities all benefited from risk-off action within the last week.

What’s Ahead

Here’s the key economic data scheduled for this week.

Mid-Month Market Update: March 2023

Technical Trends

US large cap stocks erased their hot start to the year, declining more than 5% over the past month. The S&P 500 Index has dropped back below a falling 200-day average. The Dow Jones Industrial Average is down just 2.4% over the last year, but it’s been the laggard so far in 2023. The NASDAQ Composite, meanwhile, has been the best performing major index over the last month and quarter.

Bond prices continue have risen dramatically over the past week, after turbulence in the banking sector spooked investors. Still, the 10-Year Treasury note remains below a falling 200-day moving average – clear evidence that a downtrend still exists. While yields are down from their October peak, the threat of continued policy tightening by the Federal Reserve remains a risk for fixed income investors.

Continue reading “Mid-Month Market Update: March 2023”

March Technical Market Outlook

February lived up to its reputation as one of the worst months of the year. Since the inception of the S&P 500 Index in 1950, stocks have averaged a negative return during the month. Only September has a worse track record. This year, stocks followed their seasonal pattern, as the S&P 500 dropped 2.6%, the Dow Jones Industrial Average fell 4.2%, and the NASDAQ Composite fell just more than 1%. Let’s take a look at how things are shaping up for March.

US Equities

Each month, we start our journey from the top, looking at the market from 30,000 feet up and focusing only on the biggest indexes. In just a handful of charts, we can see exactly the type of investment environment we’re in. Are stock prices rising or are they falling? Should we be erring on the side of buying or selling stocks?

Last month, our view was that stocks had made significant progress toward ending the bear market that began in 2022. Here’s how we put it:

We aren’t out of the woods yet, but we think we see the light at the edge of the forest.

The beauty of technical analysis is that prices offer us clear risk levels – we know exactly where we’re right and where we’re wrong. We entered the month with a clear view of what we needed to keep an eye on:

Small Caps are the ones to watch. With the last few days of gains, the Russell 2000 is above its own key area of resistance. That’s a good sign – small caps were the first to find a bottom last year and could very well lead us higher in 2023. But if IWM is back below 190, expect the rest of the major US indexes to be failing, too.

Well, the IWM fell back below 190. And the rest of the major indexes fell, too.

(Editor’s note: If you’re having trouble seeing any chart in this report, click on it to view a larger version)

We still aren’t out of the woods.

For months, we’ve been talking about resistance near 4100 for the S&P 500. That was our line in the sand – if prices were above that, we wanted to be buying stocks. If they weren’t, we believed a cautious approach was more appropriate.

Nothing changed during February. Stocks failed once again at 4100, and the bears still have the upper hand.

It’s the exact same situation for the NASDAQ. The level here is 12000.

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 ended a near 15-year run of outperformance. The NASDAQ, which is dominated by those same growth names, is paying attention.

There’s no reason to be aggressively buying stocks as long as we’re below those key levels. We know exactly where we want to be more bullish. So what would it take for us to shift from neutral to outright bearish on US stocks?

We’d need to see more indexes acting like the Dow.

The Dow Jones Industrial Average did more than just fail at overhead supply during February: it ended the month by breaking its December lows. This chart is the biggest threat to the bull case for stocks. If the index that’s been the leader for more than a year is now setting new lows, how can we be buying stocks?

The Dow needs to get back above 33000 in a hurry. If it does, that failed breakdown could be the catalyst that sends prices through that tough overhead resistance near 34500. The longer we’re below 33000, though, the more likely it is that stock prices overall will retest their October lows.

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(Premium) March FICC Outlook

Currencies

By the middle of January, the US Dollar Index was down than 10% from its September peak. The move pushed the index below its 2016 and 2020 peaks for the first time in nearly a year – a heartening development for equity market bulls, who watched Dollar strength wreak havoc on returns in 2022. The downtrend continued as we moved into the second month of the year, and the first trading day of February brought with it new lows for the index. All seemed well.

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Two Market Themes from February

February is nearing its end, and it’s been a month marked by two themes: failed moves followed by quick reversals and the return of a familiar foe: the US Dollar.

By the middle of January, the US Dollar Index was down than 10% from its September peak. The move pushed the index below its 2016 and 2020 peaks for the first time in nearly a year – a heartening development for equity market bulls, who watched Dollar strength wreak havoc on returns in 2022. The downtrend continued as we moved into the second month of the year, and the first trading day of February brought with it new lows for the index. All seemed well.

Then a month of declines were erased in the next 72 hours.

Continue reading “Two Market Themes from February”

The Weekly Wrap: February 27, 2023

Week in Review

The S&P 500 had its worst week since December and the Dow Jones Industrial Average dropped 3%, falling into negative territory for the year. The NASDAQ Composite led equity declines for the week, but the growth-focused index is still the best performing major index in 2023, up 8.9% since December. The US Dollar Index jumped 1.3%, its largest 1-week gain in 5 months, and bond returns continued to disappoint as 10-year Treasury bonds fell 1%. Crude oil was flat, and gold prices fell. Bitcoin dropped 6%.

Inflation data released in the month of February consistently disappointed market participants and Fed-watchers alike, as disinflationary trends from November and December slowed. Last week, market declines accelerated when the BEA published updated GDP estimates for Q4 2022 and the PCE Price Index for January. Together, the reports painted a rather bleak picture: growth from consumer spending is slowing and will face even more pressure as excess savings are depleted. Meanwhile, the disinflationary benefit from goods deflation is dissipating, while services inflation continues to creep higher. One month of data does not make a trend, but anyone hoping for evidence that the Fed can achieve a ‘soft-landing’ was surely disappointed by last week’s news.

Market Internals

Despite February volatility, more than half of all stocks in the S&P 500 are in long-term uptrends, as indicated by their positions relative to a moving average price. Between 50% and 60% of issues are above 100 and 200-day moving averages. Short-term trends, though, are significantly weaker. More than 80% of stocks companies are trading below a 20-day moving average.

Uptrend breadth is strongest in risk-on areas of the market. Three-quarters of stocks in the Financials and Consumer Discretionary have healthy, long-term technical structures, while more than 60% of members in the Materials and Industrials sectors are similarly strong. The Utilities and Real Estate sectors are in the weakest technical positions.

What’s Ahead

We’ve got a full week of economic releases ahead, but it’s mostly second-tier data. On Monday, we’ll get January numbers for durable goods and pending home sales. The Dallas Fed will release February numbers for their Manufacturing index as well. On Tuesday, it’ll be home prices, Consumer Confidence from the Conference Board, and three more Federal Reserve bank activity surveys: Chicago, Richmond, and Dallas (services). February manufacturing PMIs from both S&P Global and the Institute for Supply Management are set for Wednesday, and the services portion will come out on Friday. The final read on Q4 unit labor costs and productivity is slated for Thursday.

Mid-Month Market Update: February 2023

Technical Trends

US large cap stocks have jumped more than 7% to start the year and continue to erase last year’s decline. The S&P 500 Index is further above its 200-day average than at any point in the last 12 months, as stocks attempt to enter a new bull market. The Dow Jones Industrial Average is down just 1.4% over the last year, while the NASDAQ Composite has been the best performing major index over the last month and quarter.

Bond prices continue to fall as interest rates rise. The 10-Year Treasury note is stuck below a falling 200-day moving average – clear evidence that a downtrend still exists. While yields are down from their October peak, continued policy tightening by the Federal Reserve poses a threat to fixed income investors over the coming months.

Continue reading “Mid-Month Market Update: February 2023”

(Premium) February Technical Market Outlook and Equity Playbook

Stocks got off to one of their best starts ever in January. With every passing day, the climb looks less like a bear market rally and more like the start of a new bullish era. We aren’t out of the woods yet, but we think we see the light at the edge of the forest.

US Equities

We start our monthly technical outlooks at the top for a reason. In just a handful of charts, we can see exactly the type of investment environment we’re in. Are stock prices rising or are they falling? Should we be erring on the side of buying or selling stocks?

Last month, we had this to say about the world’s most important stock index:

The S&P 500, a market cap-weighted index comprised of 500 of the biggest companies in the United States, is stuck below a falling 200-day moving average. At best, prices are stuck in a sideways trend. The line in the sand for the SPX is 4100. That’s the 161.8% Fibonacci retracement from the entire COVID selloff, and that’s been overhead resistance since May. If we’re above that, we’ll be looking for stocks to buy. As long as we’re below it, we need to err towards caution.

Since then, the index has surpassed its 200-day. That’s one point for the bulls. But we haven’t surpassed the resistance area near 4100. The bears have the upper hand unless and until that level is taken out.

(Editor’s note: If you’re having trouble seeing any chart in this report, click on it to view a larger version)

We’re watching closely, because a few more days like the last would quickly push us above it and give us confidence to flip from a neutral stance to one that’s more bullish overall. Remember, our goal is not to nail tops or bottoms, but to catch the middles of big trends. IF this is truly the start of a new, multi-year bull market, we can afford to wait for that confirmation.

It’s the exact same situation for the Dow and the Nasdaq. The Dow Jones Industrial Average has so far been unable to absorb all this overhead supply between 34000 and 35000. It wouldn’t take much to get a breakout, but this editor is from Missouri. It’s gotta show me.

The level for the NASDAQ is 12000. That’s the 161.8% retracement from the 2020 selloff and the September 2020 peak, which marked the beginning of a regime shift as value stocks took the lead from growth. If the NASDAQ is above 12000, we can confidently be buying stocks.

Small Caps are the ones to watch. With the last few days of gains, the Russell 2000 is above its own key area of resistance. That’s a good sign – small caps were the first to find a bottom last year and could very well lead us higher in 2023. But if IWM is back below 190, expect the rest of the major US indexes to be failing, too.

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(Premium) February FICC Outlook

Fixed Income

Interest rates dropped in January, providing fuel for the equity market rally and setting the stage for growth stocks to outperform their value counterparts. The correlation between stocks and bonds is nothing new – it drove market all throughout 2022. Check out how closely the two moved together last year:

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