Is This A Bull Market?
Investors,
For the 2nd consecutive week, the equal-weight version of the S&P 500 ($RSP) closed above the 200-day moving average cloud:
There’s a famous saying on Wall Street amongst technicians that “nothing good happens below the 200-day moving average”, therefore, we can take the inverse of that axiom and say that “nothing bad happens above the 200-day moving average”.
This is why I always remain flexible around this level in terms of my intermediate term outlook on any asset.
With that said, here’s my takeaway and why you should be paying attention: so long as RSP can stay above the 200-day MA cloud (price > $144), I’ll have a bullish stance on the entire market, not just tech, industrials, discretionary, etc.
Flexible, objective, simple, effective.
I still prefer market-cap weighted exposure, which has been the dominant source of alpha all year, but I think the broader basket of the S&P 500 is ready to rock & roll.
Some folks are convinced that we aren’t in a bull market…
Maybe we are, maybe we aren’t.
What I do know is that we aren’t in a bear market. That’s good enough for me.
In the remainder of this report, I’ll analyze the most important charts I saw across the three core competencies of Cubic Analytics:
Macroeconomics
The stock market
Bitcoin
As always, I’m extremely grateful for your ongoing support of my research and proud to have 8,200+ investors on the distribution for these weekly reports. If you’re interested in upgrading to a premium membership and taking advantage of a discount on the annual membership in celebration of Black Friday, click the link below:
Macroeconomics:
Once again, I’m here to remind you that disinflationary forces are strong and to reiterate my expectation that the rate of YoY inflation, as measured by either the CPI or PCE, will continue to decelerate.
Immaculate disinflation is (and has been) here, as I’ve been saying all year.
One of the metrics that I’ve acknowledged in the past is the Prices Paid Diffusion Index for both New York and Philadelphia. Largely speaking, these variables have been on the decline since Q2 2022 and have acted as a leading indicator for YoY inflation metrics, as I’ve proven in the past (don’t worry, I’ll prove it again in just a moment).
A few months ago, I acknowledged a concern that these metrics had started to tick higher again, which could produce an uptick in YoY inflation; however, I wasn’t convinced that these “Prices Paid” components would continue to rise.
Turns out, both have continued to decline again in a convincing fashion:
These datapoints are particularly useful when we overlay the YoY headline CPI:
Or similarly if we overlay the Personal Consumption Expenditures (PCE) on a YoY basis, which will be updated next week with new data for October 2023:
Directionally, the correlation between these prices paid components & YoY inflation is crystal clear, suggesting that the current re-decline in prices paid will produce slower inflation (aka disinflation) in the months/quarters ahead.
As a final note on macro conditions, the Purchasing Managers’ Index (PMI) was updated on Friday morning for preliminary November 2023 results. PMI’s are extremely important datapoints for evaluating the broader U.S. economy, bifurcating between the service & manufacturing sectors. The important thing to understand with this data is that results above 50 are expansionary while results below 50 are contractionary. In other words, anything above 50 is good news and anything higher than the prior month is also good news.
The results for the data were:
Services: 50.8 vs. 50.6 prior (estimates of 50.2)
Manufacturing: 49.4 vs. 50.0 prior (estimates of 50.2)
Composite: 50.7 vs. 50.7 prior (estimates of 50.6)
The divergence between the service sector and manufacturing sector continues; however, I will always place a higher degree of importance on the service sector considering that it’s a much larger portion of U.S. output. Given that the Composite reading remained unchanged in expansionary territory, I think the data is solid.
Not great, but good enough.
Interestingly, the Manufacturing Output component of the flash PMI data was 50.4; however, this was a decline vs. 51.2 in October and was a 3-month low.
After reading the full report, which you can view here, these are my key takeaways:
Regarding inflation trends that we discussed above, I was pleased by this aspect of the report: “Cost pressures softened further, with input prices rising at the slowest pace in just over three years.” This is great news, confirming the data from the Prices Paid Diffusion Index that we reviewed.
Regarding manufacturing & demand, this stood out to me: “Manufacturing firms noted greater efficiency in production processes supported the increase in output, while demand conditions stagnated.” While demand appears to be softening, which is part of my overall base-case outlook, I’m pleased to see that firms are getting more efficient & productive in their operations.
Regarding the labor market, which will continue to become an increasingly important aspect of macro dynamics as disinflation persists: “U.S. companies lowered their workforce numbers during November for the first time in almost three-and-a-half years. Although only fractional, employment tipped into contractionary territory following the first drop in service sector headcounts since June 2020… Businesses commonly mentioned that relatively muted demand conditions and elevated cost pressures had led to lay-offs.” This confirms some of the softness in labor market data from October. In and of itself, this softness doesn’t represent outright weakness (yet); however, it could if we continue to stay on this trajectory. Given that the unemployment rate came in at 3.9% in October, I wouldn’t be surprised if the November result comes in at/above 4.0% in November.
Conclusions: Disinflation continues to be a predominant force while the broader economy continues to expand by a marginal amount. The manufacturing sector, which is less important than the service sector, remain on shaky legs. As we look forward, it’s clear that demand is softening and that labor market conditions could exacerbate this softness and lead to outright weakness, but we don’t have proof of that yet. As such, it will be vital to continue to monitor a wide range of conditions and to evaluate the economy using a weight-of-the-evidence approach. At the present moment, the weight of the evidence suggests that the economy is not in a recession.
Stock Market:
This week was extremely bland & uneventful in the traditional markets due to the holiday-shortened week. Volatility, as measured by the VIX, made new YTD lows and is now trading at the lowest levels since January 2020. Stock market indices in the U.S. produced marginal gains across the board and have sustained strong momentum over the past month since the October 27th lows.
At the present moment, the S&P 500 needs to gain +0.67% to achieve the highest daily close of 2023 and +1.05% to make new YTD highs on an intraday basis, both of which were achieved in late-July 2023. Similarly, the Dow Jones needs to make +0.82% to make new YTD highs (and +2.6% to make new all-time highs), highlighting strength across the market. Technology stocks, as gauged by the Nasdaq-100, made new YTD highs on both Monday & Wednesday this week.
All three indexes are (and have been) trading above their 200-day MA clouds.
Given how the equal-weight version of the S&P 500 ($RSP) is also above its 200-day MA cloud, as we reviewed in the intro, I ask one simple question:
What’s not to like about this market?
Bitcoin:
Here’s a reminder of the 6-18 month thesis for BTC:
Spot ETF approvals (yes, plural)
The Halving is ~150 days away
Disinflationary rate cuts in Q3’24
To read more about my thesis, read this report that I published on November 2nd:
Looking at the price of Bitcoin right now, trading just shy of $38,000 & up +128% YTD, I want to highlight this chart using weekly Heikin Ashi candles and the 200-week moving average cloud:
With the weekly close coming tomorrow evening (Sunday), BTC is poised to secure the 10th consecutive green weekly Heikin Ashi candle. This is the longest such streak since Q1 2021, which achieved a streak of 11 green weekly candles.
These HA candles are a valuable alternative to traditional Japanese candlesticks because they help to act as a momentum signal as well. You can read more about Heikin Ashi candles here, but just know that consecutive green candles is bullish.
After a perfect double-retest of the 200-week moving average cloud and rebound, it’s easy to be bullish right now.
Best,
Caleb Franzen
SPONSOR:
This edition was made possible by the support of MicroSectors, a financial services and investment company that creates an array of unique investment products and ETN’s. Their NYSE FANG+ products are the only one of their kind, allowing investors to gain exposure, leveraged/un-leveraged & direct/inverse, to the NYSE FANG+ Index.
For investors who are looking to generate income on their assets while also having simultaneous exposure to FANG+ stocks, their new $FEPI product is extremely interesting and worth researching on your own.
I partnered with MicroSectors in 2023 because I’ve been using their products for over a year and it was an organic and seamless fit.
Please follow their Twitter and check out their website to learn more about their services and the different products that they offer.
DISCLAIMER:
This report expresses the views of the author as of the date it was published, and are subject to change without notice. The author believes that the information, data, and charts contained within this report are accurate, but cannot guarantee the accuracy of such information.
The investment thesis, security analysis, risk appetite, & timeframes expressed above are strictly those of the author and are not intended to be interpreted as financial advice. As such, market views covered in this publication are not to be considered investment advice and should be regarded as information only. The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security.
Each investor is responsible to conduct their own due diligence and to understand the risks associated with any information that is reviewed. The information contained herein does not constitute and shouldn’t be construed as a solicitation of advisory services. Consult a registered financial advisor and/or certified financial planner before making any investment decisions.
Please be advised that this report contains a third party paid advertisement and links to third party websites. These advertisements do not constitute endorsements. The advertisement contained herein did not influence the market views, analysis, or commentary expressed above and Cubic Analytics maintains its independence and full control over all ideas, thoughts, and expressions above. The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security. All investments carry risks and past performance is not necessarily indicative of future results/returns.
Brilliant article, thanks Caleb. Enjoy your weekend 👍🏼