From the Desk of Willie Delwiche

Investors had second thoughts about stocks last week, with sentiment dropping across the board. This week’s Investors Intelligence survey shows a healthy return to optimism as bears dropped to their lowest level in over a year and the bull-bear spread moved back above its August high.   

Why It Matters: Stocks tend to do well when persistent pessimism fades. In such an environment increasing investor optimism is a bullish tailwind for stocks. The shift from pessimism to optimism is not always a one-way street. Consolidation along the way is to be expected but a return to ex excessive pessimism would not be a healthy development. The latest II data suggests last week’s sentiment shift was the former rather than the later. We will look to the AAII & NAAIM (released later this week) for confirmation that investors were just catching their breath.  

In this week’s Sentiment Report we look at how investors are responding to the recent price volatility and how that volatility may work...

From the desk of Willie Delwiche.

Dynamic Portfolio Update: Our asset allocation models are tilting away from commodities, so we sold GLD in our cyclical portfolio (and replaced it with mid-cap equity exposure). With tactical risks rising, we raised some cash in our tactical opportunity portfolio.

From the desk of Willie Delwiche.

As good as the market looked in January, it looked that bad in February. The month began with the technical conditions for the re-birth of a bull market being met, but by the end of the month there was still little evidence of bull market behavior. If the Q4 turn is going to prove resilient, it’s time for the bulls to step up and show that the path of least resistance is indeed higher. That means firmly embracing a rally that has faltered under the ongoing weight of macro concerns and is on the cusp of breaking down.

Our Weight of the Evidence Dashboard fills in the details and includes a few charts that have our attention heading into March. 

From the desk of Steve Strazza @Sstrazza

Our Top 10 Charts Report was just published.

In this weekly note, we highlight 10 of the most important charts or themes we’re currently seeing in asset classes around the world.

Don’t Ignore Coal

Our equal-weighted custom index of the largest coal stocks reached new highs last week. If this breakout sticks, coal is a group we want to keep leaning on for long exposure.

From the desk of Steve Strazza @Sstrazza

Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.

By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.

Let's jump right into it with some of the major takeaways from this week's report:

* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.

Macro Universe:

• This week, our macro universe was positive, with 79% of our list closing higher with a median return of 1.55%.
• Oil $CL was the winner, closing with a 4.40% gain.
• The biggest loser was The Volatility Index $VIX, with a weekly loss of -14.67%.
• There was a 9% gain in the percentage of assets on our list within 5% of their 52-week highs – currently at 15%.
• 4% of our macro list made fresh 4-week highs.
• ...

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.

Stocks rallied heading into the weekend, with the S&P 500 finishing up 1.6% for the day. Friday’s 1%+ move ended four consecutive days of relative quiet, the longest stretch without a 1% swing (on a closing basis) since a seven day streak in mid-November. We still have had just one week over the past year that did not experience a single 1% swing in the S&P 500.

Why It Matters: Bull markets are characterized by persistent strength, steady progress, and more often, relatively few big swings. That was the case coming off of the COVID lows. 2020 and 2021 saw multiple weeks without a single 1% daily move in the S&P 500. 2022 brought plenty of noise and plenty of volatility. That has persisted as we have moved into 2023. While the week finished on an upbeat note, the pattern of behavior is little changed. Just a month ago we experienced the first full week of 1% swings since March 2020.

This is the video recording of the March 2nd, 2023, Weekly Town Hall w/ Willie Delwiche.

03/02/23 2:00 PM ET

From the Desk of Willie Delwiche

When the Fed raised rates to 4.50% in early February, the market was expecting that any additional tightening this Spring would be taken back (and then some) and that by the end of the year the Fed Funds Rate would be at 4.25%. Now, the market is pricing in a year-end Fed Funds Rate of at least 5.25%. Over the course of a month, market expectations for rates have shifted higher by a full percentage point.     

Why It Matters: Stocks stumbled in February as the markets digested the shift in expectations from “rate cuts by the end of the year” to a “higher for longer” reality. This led to investors who had been slow to embrace stock market strength to reconsider recently discovered optimism. We have documented that stocks tend to do well in the wake of persistent pessimism. Under-pinning this analysis is the assumption that pessimism is indeed fading. If expectations for higher rates lead to renewed pessimism, it will be difficult for sustainable strength to emerge. You need to have bulls to have a...

From the desk of Willie Delwiche.

Dynamic Portfolio Update: This year's rally has so far failed to turn long-term trends higher and is starting to look ragged. As we see how this period of digestion plays out, we are reducing the equity exposure in our Tactical Opportunity Portfolio.

From the desk of Willie Delwiche.

Moving into commodities when they are trending higher versus stocks increases return and lowers risk relative to otherwise static equity exposure. Commodities may not always earn a spot in our portfolios, but we do well to remember to include them in the asset allocation conversation. 

Why It Matters: Commodities can go nowhere for years on an absolute and relative basis. 90% of the time from 2012 through 2020, the CRB index was in a downtrend relative to the S&P 500. During that time period commodities got the reduced portfolio exposure that they deserved. In many cases they got dropped from the conversation all together. Commodity leadership of the last couple of years revealed that to be short-sighted. With commodities cooling off and stocks again getting the upper hand on a relative basis, we can reduce our exposure, but let’s not exclude them from the conversation. As long as an asset has a seat at the table, we can choose to minimize our exposure to it. But...

From the desk of Steve Strazza @Sstrazza

Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.

By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.

Let's jump right into it with some of the major takeaways from this week's report:

* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.

Macro Universe:

• This week, our macro universe was negative, with 89% of our list closing lower with a median return of -2.14%.
• The Volatility Index $VIX was the winner, closing with an 8.24% gain.
• The biggest loser was Silver $SI, with a weekly loss of -4.17%.
• There was a 7% drop in the percentage of assets on our list within 5% of their 52-week highs – currently at 6%.
• 9% of our macro list made fresh 4-week highs.
• ...