From the desk of Willie Delwiche.

Even with the impressive bounce heading into the weekend, the S&P 500 last week didn’t even get back up to its December high. Meanwhile nearly 10% of the industry groups in the S&P 1500 and more than 10% of global markets closed at new 52-week highs. That’s the longest new high list by the rest of the world in nearly a year.

More Context: The last decade has conditioned investors to look to the S&P 500 for leadership. Many have concluded that if US large-cap stocks are not showing strength there isn’t much opportunity in equities. That is becoming an expensive assumption. Our global equity work is tilting away from US exposure and within the US, large-cap growth is approaching max underweight. Getting stuck in the last decade’s paradigm means not seeing the strength that is emerging in this new environment. The S&P 500 continues to move sideways between its June low and August high and is contending with a challenging trend backdrop. It’s time to turn the page on that index and embrace new...

From the desk of Willie Delwiche.

The conditions for the re-birth of a bull market were met earlier this month, but the confirmation of strength has been underwhelming. Of the six indicators on our bull market behavior checklist, only one is currently meeting the bull market criteria.

More Context: Our bull market behavior checklist is a balance of breadth & price indicators, designed to reflect persistent turns toward risk or opportunity. We don’t want to be so focused on what is happening at home that we lose sight of what is happening overseas, so we use both US and global market data. These indicators are not discrete signals that can be overly influenced by day-to-day volatility (of which there has been plenty) in recent months but are ongoing measures that reflect a continuous environment. While our checklist is not indicating a healthy breadth of bull market behavior, it would be premature to suggest that the rally off of the Q4 lows is on its deathbed. But after last week, the rally has gone from feeling tired and rundown to...

From the desk of Willie Delwiche.

Coming into this week, we’ve seen more new highs than new lows every day so far this year. Improved breadth helped fuel a higher high for the S&P 500. But with the index dropping back into its December range and new highs struggling to expand, the going, for now, is getting rough.

More Context: If our perspective just goes back to the late-September/early-October lows, the pattern on the S&P 500 is an encouraging higher low followed by a higher high accompanied by improving breadth. If we push back a little further, we still get breadth improvement but the S&P 500 pattern is more ambiguous. This month’s higher high could be an eerie inverse of last fall’s lower low (which quickly reversed), though we haven’t seen enough deterioration to this point to argue for more defensive tactical positioning. So long as the S&P 500 is above the June lows and below the August highs, acknowledging that sideways is a direction would not be inconsistent with the cyclical weight of the evidence that is in...

From the desk of Willie Delwiche.

The Value Line Geometric Index peeked above its August high but it continues to struggle with sustaining strength. We don’t have evidence at this point of that being a meaningful peak but for now this proxy for the performance of the median US stock is trodding across well-traveled ground.

More Context: The Value Line Geometric index has a penchant for living between round numbers. In the years prior to COVID, it moved up from 500 to 600 and back down to 500. During 2020, it dropped to 300 before recovering and settling in beneath 500. A break above that level led to a quick test of 600, Further strength carried it to 700 in late 2021. It paused at 600 before spending most of last year moving back and forth between 500 and 600. After a strong start to the year for stocks, some near-term consolidation (especially in the US) would not be surprising. If recent patterns hold, that could mean the Value Line Geometric Index moving back toward 500. If that scenario is going to play out, we are likely to see more...

From the desk of Willie Delwiche.

The number of stocks making new lows remains negligible. Last week, the number of stocks making new 52-week highs on the NYSE + NASDAQ surpassed a number of prior peaks (Dec 2021, Apr 2022, Nov 2022). It’s now at its highest level since November 2021.

More Context: Everyone has their own definition of a bull market. For me, it’s when more stocks are making new highs than new lows. Bear markets tend to end when new lows drop below new highs. Bull markets are sustained when new high lists expand. We are seeing that now among individual stocks and we are seeing that at the industry group level (especially outside of large-caps). In moving from 2022 to 2023 we have transitioned from broad weakness to broad strength. Big day-to-day price swings haven’t gone away, but after volatile years (like we experienced last year) that can be slow to ebb. Most of the strength that looks sustainable is happening beneath the surface of the popular benchmarks or beyond the borders of our country. It’s a new year with new...

From the desk of Willie Delwiche.

2023 is on the cusp of producing as many days with new highs greater than new lows in its first month as 2022 produced over the course of the entire year. Yet there are hurdles to overcome to convincingly argue that this recent strength is sustainable.

More Context: From a macro data and Fed policy perspective, this week holds the promise to be pivotal. That is no less true from a price perspective. More stocks making new highs than new lows is bull market behavior. The S&P 500 not clearing its December high (in the context of still declining longer-term trends) is not. In addition to further trend improvement, renewed expansion in the number of stocks making new highs and continued recovery in our industry group trend indicator would be evidence of rally sustainability. Our equity models aren’t waiting for “what ifs” and while the S&P 500 is an option, it’s not the only one. Our equity positioning is increasingly outside of the US and away from large-cap growth stocks.             

In our ...

From the desk of Willie Delwiche.

The S&P 500 has rallied off of its October and December lows, but the 200-day average, which rolled over in April 2022, continues to fall.

More Context: Price trends matter. Over the past 2+ decades, all of the net gains for the S&P 500 have come when the index’s 200-day average has been rising. When the trend has been falling, the index has struggled to keep its head above water. While stocks have begun 2023 in rally mode, they are still fighting a downtrend. Stocks can rally within persistent downtrends. But if stocks keep rallying, down-trends cannot persist. The math just doesn’t work. While we are seeing evidence of a tactically more constructive environment, the longer-term trend backdrop remains challenging. The recent strength has a better shot at being sustained if it can flip some of the longer-term trend indicators to a bullish setting.           

In our Market Notes, we take a closer look at longer-term price trends, recent breadth improvements and paradigm shifts that are...

From the desk of Willie Delwiche.

The shorter-term risk indicators have teased the possibility in recent weeks, but now for the first time in a year, our longer-term Risk Indicator has moved into Risk On territory.

More Context: This risk indicator is made up of 20 (intermarket and intramarket) ratios that pair various risk on and risk off assets. It ebbed and flowed over the course of 2022 but remained in Risk Off territory all of last year. Paired with the turn higher in our net new high advance/decline line, this is evidence of an improving backdrop for risk assets. These are not discrete signals (like so many breadth and momentum thrusts) but are continuous indicators of the environment in which we, as investors, are operating. 

I have long leaned on breadth thrust signals in my work. But with more and more of them popping up all the time, it is now a case of thrust but verify. In contrast to what we saw last year, our risk indicators and the new high vs new low data are providing important confirmation of market strength (as...

From the desk of Willie Delwiche.

New highs exceeded new lows last week for the first time since August (and only the third time since November 2021). That is a positive development but there is more work to be done before concluding that a new bull market has been reborn.

More Context: With this week’s improvement, our bull market re-birth checklist now has two out of the five criteria satisfied. It’s heading in the right direction, but 2022 was full of bounces that were not sustained and strength that did not persist. Big moves in both directions was a key part of last year’s experience, which saw the S&P 500 recording the 3rd most 3% up weeks and the 3rd most 3% down weeks in the past 70+ years. Further, we are seeing relative trends point to new leadership (equal-weight over cap-weight in the US; the rest of the world over the US on a global basis), but in most cases, the new leaders remain in longer-term down-trends. If we want to get more constructive on equities as an asset class, that needs to change.       

In our ...

From the desk of Willie Delwiche.

The uptrend for bonds peaked in early 2021. The trend for stocks did so a year later. Commodities peaked in June and over the past few months the trend has been slowly (an unevenly rolling over). 

More Context: It could always reverse higher, but the commodity trend has fallen two weeks in a row and is down in 6 of the past 10 weeks. As the summer peak in commodities moves further into the rear-view mirror, it looks increasingly like all three of the major asset classes are now in downtrends. This leaves investors with fewer places of refuge as the most challenging year in a generation grinds to a close. Business cycle history suggests that the next important turn in trend will be bonds turning higher (and bond yields turning lower). It hasn’t happened yet (despite the recent drop in bond yields) but our long-term trend indicators suggest bonds are closer to turning higher than stocks (and bonds are trending higher relative to stocks). While the pattern is not set in stone, equities have not made the case that...

From the desk of Willie Delwiche.

Key Takeaway:

• Volatility is taxing investor portfolios
• Stocks reckoning with new liquidity regime
• New lows are expanding as selling pressure crescendos

Stocks remain weak and selling pressure has intensified. Risk On indexes are breaking down and the Risk Off environment remains intact. Some see volatility as the price of admission that investors need to pay to receive the long-term return potential in stocks. I see it as a portfolio tax that you are better off not paying. It should not be a surprise that in avoiding an equal number of the best and worst days in the market, portfolios experience less volatility and better returns over time. While we cannot hand select the days we want to avoid, we do know that the biggest up-days and down-days tend to cluster together in periods of market stress....

From the desk of Willie Delwiche.

Key Takeaway:

• 2022 gives investors no place to hide.
• Stocks do well when rates rise slowly - an aggressive Fed is a headwind for investors.
• Hard to argue that a bear market has run its course when more stocks are making new lows than new highs.

The future’s market now expects 50 basis points of tightening at this week’s FOMC meeting to be followed by another 75 basis points of tightening at the June meeting. On top of the 25 basis point rate hike in March, that would be 150 basis points of tightening in just three meetings. It’s been a long time since the Fed moved at such an accelerated pace. For equities, not all tightening cycles are created equally. Stocks can hold up well when the Fed is pursuing a deliberate pace, but tend to suffer in periods when the pace of rate hikes is rapid....