Do You Feel Risky, Punk?
Investors,
FOMO, excess, and exuberance are fueling the market. For right or for wrong, that’s the truth. Despite an abundance of data & developments suggesting that yields will remain higher for longer, risk assets were dismissive and investors piled in. More specifically, the market grappled and overcame the following dynamics this week:
Inflation data (CPI & PPI) that decelerated but came in hotter than expected.
Economic data (retail sales) that beat estimates & prior month results.
Hawkish speeches from Federal Reserve members, hinting to +0.5% rate hikes.
In 2022, the market would have plummeted in response to these cumulative developments. In 2023, the market is shrugging it off.
Maybe this resilience indicates a regime change, or maybe it’s totally unwarranted.
In yesterday’s newsletter, I compared the current market rally to the dynamics that occurred in June-August 2022. At the time, the indexes were overcoming significant hurdles and making statistical milestones that added ammo to the bullish argument. We’re seeing the same exact trend today, with new hurdles being overcome. One of these accomplishments in particular is standing out to me, which I think everyone should have on their radar:
What exactly is it showing? Each case where the S&P 500 managed to stay above the 200-day moving average for at least 18 consecutive days AFTER falling at least -20%.
The data speaks for itself, but here are some particular aspects that stand out to me:
The index is higher 100% of the time one year later. Historically, the S&P 500 is higher ~70% of the time on a 1-year forward basis, so this success rate is significantly higher than the normal behavior of the index.
The index has NEVER produced new lows once this signal flashes. Does that mean downside, volatility, and pain are going to disappear? No. But it does improve the likelihood that the October 2022 lows for the S&P 500 are THE lows.
Adding onto the point above, max losses are extremely minimal going forward (even on a case-by-case basis).
These signals don’t occur often, with only 12 signals over the past ~65 years.
While statistics are extremely useful, we must remember that they don’t operate in a vacuum. Economic data, Fed actions, and/or geopolitical risks could completely nullify the forward-looking implications of this signal. As investors, we must be willing to accept that the data worked in the past but isn’t guaranteed to work going forward.
In many ways, Clint Eastwood is pointing his .44 magnum at investors and asking them: “Do you feel risky, punk?”
In fact, I’m curious to know how you are feeling about the market right now!
In the remainder of this report, I’ll share a new investment opportunity that I might start buying as soon as this upcoming week. This newsletter will predominantly focused on the investment analysis of this stock, which I’m very enthusiastic about over the long run! To cap things off, I will also analyze under-the-hood metrics for the S&P 500 in order to highlight how the “currents” of the market are evolving.