Market review 23.01.08
Lots to be bullish about as we start 2023
Happy new year everyone!
I hope you all had a nice break over the holidays.
In my last 2 blog posts from mid-Dec, I discussed the bullish picture for equities, especially non-US stocks. I want to build on that today.
We will look at:
Price action: 2022 gave us bullish breadth divergences. We also got some major base retests and failed breakdowns. Now we have several markets on the verge of multi-year breakouts.
Supporting metrics: seasonality, sentiment, and valuations are all supportive of higher stock prices.
Relative strength: If the broad market is bullish, where specifically do we allocate to get the most upside potential?
Sorry, but you’ll see no “Top 5 predictions for 2023” from me. 😉
Price action
In 2022, the price action was generally ugly. By early Oct, we had IEF, SPY, and VEU down -17%, -23%, and -26%, respectively.
Media headlines have been all about the doom: Runaway inflation, rapidly rising interest rates, weakening housing market, declining manufacturing data, and massive tech layoffs. A recession in 2023 has been the foregone conclusion among the talking heads.
Meanwhile, the price action has been flashing bullish signs in the second half of 2022.
One key development has been market breadth. While SPX made a new 52-week low in Oct, fewer & fewer stocks did the same since May!
The chart above can also be applied to the prior bull market: While SPX made a new 52-week high in Dec ’21, fewer & fewer stocks did the same since Mar ’21. I love how breadth can show us a gradual transition taking place in the market well ahead of the major indices.
Apart from breadth, what has me very bullish is that several major long-term bases were retested and reclaimed in 2022. And we now even have some markets on the verge of multi-year breakouts.
Let me show you.
Major base retests:
Foreign markets: Below are quarterly charts for Emerging Markets (VWO) and Japan (EWJ).
US sectors: Below are monthly charts for Financials (XLF) and Home Builders (ITB).
False breakdowns:
The German DAX Index and the broader VEU ETF recovered some major support levels.
Ditto for Canadian dividend stocks (XDV):
Breakouts (pending and confirmed):
The credit market is giving us a bullish picture. The HYG:IEI ratio (Junk vs. Treasury bonds) is near the upper-end of a 1-year base:
A lot of foreign markets are near multi-year highs, on the verge of a breakout. Below are the UK (FTSE-100 Index), Greece (GREK), Southeast Asia (ASEA), and Argentina (ARGT).
Japanese and European banks have seen very large rallies in Q4. Checkout the 2nd largest Japanese bank: link.
Within the US, Industrials (ITA, XLI, Railroads) look fantastic.
Back in July, I mocked the recession narrative by pointing out that the chart for CP Rail was looking constructive (link).
Insurance (IAK ETF) and several stocks within the medical devices space look excellent (link).
Finally, here’s the weekly chart for Berkshire Hathaway. What a beautiful breakout, retest, and then in the first week of ‘23, an upside follow-through.
All these price charts not only tell us that we’re in an uptrend, but they define our risk-management levels.
Supporting Metrics
Two blog posts ago, we looked at these indicators that support the bullish view of the market:
Sentiment: Smoothed values for AAII Net Bulls and the Put/Call Ratio hit extreme pessimism.
Seasonality: We're in the best 6 months (Nov-Apr) period of the year, as well as the most bullish window of the 4yr Presidential Cycle (link).
Valuations: Forward PE’s for US Small Caps, China, and other market segments were trading among their lowest values in decades.
Charts for all the above indicators can be found in this tweet.
Relative strength
Notice how a lot of the charts up until now have been foreign markets? Not only did they hit/recover major support levels, but they have been some of the top performers of 2022:
And with the first week of 2023 in the books, what’s led? Foreign stocks. KWEB, FXI, VNM, VEU are up 4-14% (while SPX and QQQ were up 1-2%). Winners keep winning.
We can visualize the change in global leadership below. SPY broke down relative to VEU in late Nov:
Here’s a map of global leadership, as defined by distance from 52-week highs and lows:
We see that ETF’s for Mexico, Thailand, Turkey, Spain, UK, and Denmark are within 10% of 52-week highs despite being priced in US dollars. Meanwhile, Turkey, Poland, and China have seen the biggest % moves from their 52-week lows.
And here’s how the broader asset & sector ETF leadership looks:
Currently, what’s leading is China (KWEB, FXI), industrials (XLI, ITA), insurance (IAK), energy (XLE), and gold (SLV, GDXJ).
In the gold space:
There’s been a lot of false breakdowns (link)
Several gold miners are near multi-year highs. Watch these names for a breakout (link).
Closing Notes
I hope to have provided a clear picture for why the broad equity market (especially outside the US) is bullish here.
Now, this doesn’t mean all stocks have to participate on the upside. For example, speculative stocks (eg. meme names, cannabis, crypto) are still in strong downtrends.
I’ll leave you with these tweets to reflect on:
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Twitter: @alphacharts.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.