Upticks – March 2023

Update

Happy Spring, and the Bull is Back??!! 1^st Quarter 2023 has come to a close with SPX having achieved the highest monthly close since last July! Technology has certainly been the standout in this regard and its outperformance has catapulted Tech to the top of the sector performance returns over the last one-week, one-month and 1^st quarter periods.  While the recent banking crisis has resulted in an exodus out of banking stocks, the US stock market has certainly proved to be far more resilient than most have given it credit for in recent weeks.  Now US markets finalize Q1 with a stellar comeback and enter the Second quarter in one of the best historical months for performance all year amidst a sea of ongoing pessimism.  While some eventual backing and filling might be necessary as markets near the historically bearish Pre-election month of May, it pays to keep an eye on not only sectors like Technology which have been working, but others like Healthcare and Energy, which are making a comeback.

As Q1 comes to a close, markets have seemingly shunned the uncertainty surrounding earnings declines or worries about the FOMC’s endgame for monetary tightening.  Furthermore, the threat of recession remains a very real possibility at some point in the future, in my view.  However, ongoing resilience in Technology stocks combined with some stabilization in the Banks looks to certainly have been a positive for US equity markets. Now the bounce is starting to gain credibility as breadth starts to show evidence of ratcheting up over the past week.

Technically speaking, markets certainly seem better as March has come to a close than they appeared at the end of February.  The strength over the last three of four weeks has successfully helped weekly momentum gauges like MACD turn back to positive territory.  Moreover, following a scary plunge into mid-March which took a brief toll on momentum and breadth, over 65% of stocks are now trading above their respective 20-day moving averages, an impressive comeback indeed. Despite some minor uptick in defensive strength lately from sectors like Staples and Utilities, there has been some stabilization in the Financials sector which looks constructive.  Moreover, other important SPX sector constituents like Healthcare (2^nd largest SPX group by market capitalization) have slowly but surely begun to kick into gear. 

Overall, bearish sentiment seems to be an important arrow in the quiver for bulls for 2023 thus far.  Similar to last month, market participants remain unclear as to the endgame for monetary tightening, or how this new Fed balance sheet expansion juxtaposes with this year’s renewed commitment to QT.  Moreover, the uncertainty regarding forward earnings guidance and/or the threat of an impending recession all seem very real.  However, as Fundstrat’s Head of Research Tom Lee mentioned recently, it’s thought that the credit tightening as a result of the banking malaise combined with the uncertainty likely causes inflation to start to roll off sharply in the months to come.

Two possible roads look likely in the months to come.  First, either Tech starts to stall out and reverse from its recent overbought state and other sectors fail to pick up the slack.  This would likely make US Equities vulnerable to a selloff in late April into May.   The second and more probable possibility in my view is that sectors like Healthcare and Financials start to rally to help buoy US equity markets, which combined represent nearly 25% of the S&P 500.  Some stabilization and bounce in the Banks would certainly be a vote of confidence after many have been unfairly punished in recent weeks. 

Importantly, bearish sentiment remains a key positive factor from a contrarian standpoint which should lead to strength in Equities this Spring.  Cash levels have rocketed up to over 6.1 trillion in recent weeks, and exposure to US Equities remains low based on threats of ongoing downward earnings revisions.  Bottom line, it’s thought that this pessimism and concern about systemic banking failure is very much overdone.  

Two key additional factors bode well for Equities to buck the bearish sentiment and continue their recent rally.  First, pre-Election year seasonality continues to show superior performance in 1^st and 2^nd Quarter for 2023.  April has historically proven to be a very strong month for US Stocks and lags only January in its pre-election year positive return tendencies.  This seems like a strong tailwind for risk assets.

Second, cycle composites based on a confluence of historically accurate cycles all show a much better year for 2023 than 2022.  As mentioned last month, many International equity indices like France and the UK have seen their respective benchmarks rise back to new all-time high territory.  While the US underperformed over the last six months since the peak in Fall 2022 vs. Europe, this has been insufficient to break larger uptrends in place in US outperformance which have spanned more than a decade.  Growth has snapped back vs. Value, and Small-caps have begun to stabilize in recent days following a regional-bank led period of underperformance.  Given the recent downturn in both Treasury yields and the US Dollar, it’s thought that both of these remain key bullish arguments for US equities and both Yields and the Dollar could still weaken through the month of April.

Overall, it looks right to be positive in Q2 given a combination of bearish sentiment, improving breadth, seasonal tailwinds, and a declining inflation picture.  Technicals have certainly improved for risk assets in recent weeks. The ability to recoup SPX 4200 should help this market rally broaden out even further.  If sentiment starts to become bullish into mid-April on further gains, a pullback would be a definite possibility into May.  However, given no evidence of Technology weakening, I believe it’s right to trust this move in Tech, and back to Growth regardless if earnings are poor.  Trends are improving and the bullish seasonal month of April awaits.

Methodology

• Relative strength vs. sector and index At/near 26-week and/or 52-week highs
• Positive momentum and/or Upward sloping moving averages on multiple timeframes
• Lack of DeMark exhaustion on daily, weekly, monthly and/or in combination based on TD Sequential and/or TD Combo indicators
• DeMark “TD 13 countdown Buys” utilizing TD Sequential and/or TD Combo indicators at/near lows on multiple timeframes
• Elliott-wave theory
• Positive momentum divergences (at/near lows for buy candidates), Lack of deterioration within its sector and at/near upper quartile of its annual range
• Above-average bullish bases for lengthy timeframes which might precede technical breakouts

Additions

CBOE Global Markets ($CBOE- $134)

CBOE looks right to have exposure to given its recent strength as part of the broad consolidation pattern which has kept this stock sideways over the last five years. While the Financials space has been under pressure in recent weeks, stocks like CBOE have been slowly but surely gaining ground. Furthermore, CBOE has managed to improve its relative strength among its peers dramatically since last Summer, showing much better absolute strength than NDAQ, or CME.  Short-term momentum is positively sloped and rising, and gains look likely up to $138 initially with movement above leading up to $150.  CBOE’s entire pattern since 2018 resembles a giant reverse Head and Shoulders pattern, and its recent uptick in momentum likely helps this follow-through in the weeks to come.  Support lies at $116 and can’t be breached without postponing the rally.

Additions

CBOE Global Markets ($CBOE- $134.24)

Transdigm ($TDG- $737.05)

Deletions

Northrup Grumman ($NOC – $461.72)

Laggard deletions- Exiting the three laggards heading into April. These will be revisited at a future date, but removing TSLA, GME and EXPE.

Sector Summary

Upticks

Sector Outlook

Sector Commentary

Energy looks to be finally beginning its seasonal rally following a difficult four-month period of underperformance.  Gains in WTI Crude oil back over $74 look important in providing some stabilization in this group at a time when many remain bearish on Crude’s prospects.  Four important reasons make Energy seem compelling at current levels.  First, many Energy ETF’s and Crude oil reached oversold territory on weakness into mid-March.  Second, seasonality shows Crude oil and the Energy sector to be entering the best three-month stretch of the year, which normally results in outperformance for Energy.  Third, bearish sentiment abounds, and CFTC data as of 3/20/23 showed WTI Crude short positions from Non-commercial positioning having reached new four-year highs.  Fourth, my cycle composite shows weekly cycles bottoming for Crude and beginning a sharp two-month upswing. Finally, intermediate-term relative charts of Equal-weighted Energy vs. Equal-weighted SPX pulled back to, but did not violate, important support from 2020 lows.  Thus, this mean reversion out of Energy seems to have just been a seasonal time of weakness and much needed consolidation for this sector following 2022’s dramatic outperformance.  Overall, Energy looks attractive at current levels, and it’s right to own Energy and buy dips, particularly in Refining, Integrated and Oil Services names, in my opinion.  Key Energy names to focus on: $MPC, $LNG, $OXY, and $HES, and new long in $VLO.

Technically-Preferred Stocks

Sector Commentary

Similar to Energy, Healthcare’s weakness over the last two months is thought to represent an attractive opportunity to overweight this sector after recent underperformance.  Importantly, Healthcare looks to be on the verge of an important relative breakout vs. the S&P 500.  The ratio of Equal-weighted Healthcare to Equal-weighted SPX has rallied back to the high of the recent consolidation after just minimal pullback.  Scrutinizing some of the sub-sector performance, there’s been some meaningful recovery in both Pharmaceutical stocks as well as some of the Medical Devices names in recent weeks. Both sub-industry groups have outperformed other areas like Biotechnology, but it’s expected that Biotech is nearing a time of outperformance if the cyclical projections for this sub-sector materialize as planned.  As mentioned last month, quite a few Pharma names achieved meaningful long-term breakouts of highs achieved back in 1999-2000 making dips an attractive opportunity to give this group some focus.   Overall, a breakout above December 2022 highs would make Healthcare more appealing when viewing relative charts of $RYH vs. SPX.  Favorite longs include $VRTX, $REGN, $UNH, $HUM, $BMY, $MRK, $AMGN, $BSX, and $LLY.

Technically-Preferred Stocks

Sector Commentary

Industrials remains technically attractive following its breakout to new yearly highs in relative strength vs the S&P 500 on an equal-weighted basis last month. Despite some of the minor consolidation which affected many sectors since early February, Industrials has not given back its breakout, but has merely shown mild consolidation. While some of the larger $XLI weightings like $HON and $MMM remain underperformers, stocks within the Electrical Equipment and Machinery sub-industry group appear particularly attractive. While this group has thrived given a six-month decline in the US Dollar, which might require a bounce after hitting support, it’s expected that a larger decline should begin in the Dollar into next year. This should prove important to outperformance in Industrials. While Technology remains the best performing sector for 2023 given recent strength, it’s not wrong to say that Industrials looks better technically as a risk/reward sector for long positioning given its recent structural improvement. Overall, Industrials remains one of my favorite areas for outperformance in 2023, and is still very much an Overweight. Favorite stocks include: $ADP and $PWR.

Technically-Preferred Stocks

Sector Commentary

Technology has shown such dramatic outperformance in the last few months, that it’s gone from 2022 laggard to 2023 leader very quickly.  Technology is now outperforming all other sectors on a 1, 3, 6 month basis both in cap-weighted and also Equal-weighted terms.  As shown in its relative chart vs. S&P, the Equal-weighted Technology ETF by Invesco ($RYT) broke out of its intermediate-term downtrend in January of this year.  As might have been expected, this was a very bullish development and sharp outperformance has gotten underway from most parts of Technology.  Given that Technology seems to benefit as yields go lower, the recent Banking crisis that caused the Treasury rally has been quite constructive for Technology.  Furthermore, since it looks likely that rates can continue trending down into May, it’s likely that Technology will continue this recent outperformance in the seasonally bullish month of April.  While some cycle charts of AAPL show the potential for a mid-April peak, (and Technology’s relative outperformance has gotten a bit overbought) it’s thought that pullbacks will offer buying opportunities in the month of May for those who have missed out on this rapid rise.  Overall, Technology remains attractive technically speaking and remains an Overweight. Key stocks to favor include: AAPL, MSFT, and ON.

Technically-Preferred Stocks

Sector Commentary

Materials has slumped a bit since early February, but this might be changing quickly given the rapid recovery in commodities in recent weeks.  Precious and base metals have been showing stellar strength lately while many Soft commodities and the Grains have also begun to rally.  The recent decline in real rates seems to have positively influenced Materials, and this looks to continue over the next month ahead of a possible short-term bottom in rates and the US Dollar.  Overall, near-term weakness likely should present actionable opportunities to give this sector consideration for strength in the months to come.

Technically-Preferred Stocks

Sector Commentary

Equal-weight- The short-term breakout in Consumer Discretionary vs. the Equal-weighted S&P 500 has not been given back materially since US Equity markets made minor peaks in early February, and Discretionary remains trending higher vs. Staples after making a similar breakout in relative strength two months ago.  While sub-industry groups like Casinos, and Cruiseliners have faltered a bit in recent weeks, I believe areas like Homebuilding and Home Construction still appear like good risk rewards within this sector.  Overall, the overbought conditions in many Retail and Leisure names hasn’t yet resulted in this sector stalling out and turning back lower in a meaningful enough way to avoid it.  Yet, Discretionary is not nearly as attractive as Technology, nor Industrials and remains an Equal-weight.  While near-term overbought conditions could eventually result in Discretionary consolidating some of its recent gains, this appears early at the present time. Favorite longs include: $LEN.

Technically-Preferred Stocks

Sector Commentary

The recent consolidation for US Equities since early February has benefited Consumer Staples, and this sector has shown a constructive bounce relative to the Equal-weighted S&P 500.  However, this recent strength still doesn’t make Staples a group to favor in the short run in the short run.  Relatively speaking, Staples should encounter resistance into mid-April and likely show weakness into the month of May.  However, for those seeking defensive exposure, Consumer Staples is certainly more appealing than either Utilities, or REITS but less attractive than Healthcare. A Neutral view looks correct, technically speaking, and selectivity is important. Favorite stocks include $DG, $MNST, $CASY, and $HSY

Technically-Preferred Stocks

Sector Commentary

Despite the minor bounce over the last week, Utilities continues to trade quite weak and has underperformed steadily since December of last year.  While rates have pulled back given the recent Banking crisis, Utilities have performed not nearly as well as might have been expected, and remain within a downtrend from last Fall relative to the Equal-weighted S&P 500. Until sufficient evidence occurs of Utilities breaking out of the downtrend vs. the SPX or markets show more evidence of material weakness, it’s thought that Utilities should still underperform heading into one of the more bullish seasonal months of the year.  Both Consumer Staples and Healthcare are more attractive than Utilities and it’s not an attractive technical group to overweight, in my view.  Favorite Utilities to buy/own: $CEG, $NEE, and $SRE.

Technically-Preferred Stocks

Sector Commentary

Financials relative strength took a big blow with the recent crisis in SVB which metastasized to other Regional Banks.  While the Equal-weighted charts of Financials vs. S&P 500 looks to have tried to stabilize near former lows from 2020 along with 2011, the sharp downward shift in momentum is problematic for this sector, and underperformance looks likely for 2023, despite the possibility of a bounce in many oversold Banking names.   The possibility of economic weakness given this Banking crisis has resulted in Treasury yields falling sharply, and falling yields looks likely for the immediate future given cyclical projections.  Thus, while lower rates might help the unrealized losses in many of the formerly afflicted Regional banks, it’s not likely to be a savior for the Financials space.  As discussed, relative charts show the ratio of $RYF to $RSP having reached the lower end of this long-term range very quickly.  If/when this does begin to break down to new yearly lows, this would bring about a larger period of underperformance for Financials, and it looks right to avoid putting too much faith in a big bounce out of this group.  Financials have been changed to an Underweight for 2023 given this recent severe downturn in momentum.  Favored stocks: $PGR and $CBOE.

Technically-Preferred Stocks

Sector Commentary

The near-term strength has continued for Communication Services, (Comm Svcs) and this remains the second best sector in YTD Performance behind Technology.  Yet, on a 12-month basis, it remains lower by over 16% and has not broken relative downtrends vs. S&P 500 since it peaked in March 2021.  Until this Sector can turn higher on an intermediate-term basis, I feel it’s right to leave it as an Underweight, but would change this to Neutral if it can exceed February highs vs the market. Such a development would allow Comm Svcs. to begin to extend its near-term outperformance and likely show better performance for the year.  In my view, near-term stocks like $TMUS are ones to overweight

Technically-Preferred Stocks

REITS have broken down sharply as a result of the Banking crisis, and relative charts of Equal-weighted REIT ETFs from Invesco ($EWRE) vs Equal-weighted S&P 500 ($RSP) have undercut yearly lows going back since 2021.  While a small bounce looks underway after some recent stabilization, it hasn’t been strong enough to recover the area of its relative breakdown.  Overall, I believe it’s still right to consider REITS an underweight.  Preferred REITS to own include: $PSA, $EXR, and $IRM.

Technically-Preferred Stocks