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Market review 23.02.26
Remaining bullish but setting realistic expectations
This week, stocks pulled back. I want to remind us why the picture is still bullish, but also set realistic expectations.
The picture remains bullish for stocks
Last year, we saw big base retests:
Japan, Emerging Markets also tagged long-term support. Germany, Greece came out of multi-year bases (link).
BTC (which is highly tied with stocks) not only tagged support dating back 5 years, but it also did so relative to almost everything (link). Its 6-month RSI hit a level that is inline with prior cycle lows (link).
This week, we saw smaller base retests.
The chart below shows XGRO (an ETF holding 80% global equities, 20% bonds) retesting 1yr support. There are similar charts for XHB, XSD, BRK, and many other tickers (link).
And here’s defensive sectors still in downtrends vs. SPX:
A list of additional factors:
Junk bonds are holding firm vs. US treasuries: Link
Confluence of seasonality right here: Link
Recent trifecta of breadth thrusts that historically resulted in a 1-year avg subsequent return of 25%.
Setting realistic expectations
In my trading career, we had numerous sizeable rallies off major lows. 12-months after the monthly-closing lows in ‘09, ‘11, ‘16, ‘18, and ‘20, the S&P 500 was up between 23-54%.
Yes, based on many of the points I listed in the previous section, you can argue that a similar big rally is underway right now.
But let’s not get carried away.
Some points to temper the excitement I may have caused up to now:
We had a feeding frenzy in many speculative parts of the market (profitless tech, NFTs, meme stocks), and there’s a lot of technical damage on even the largest, blue-chip tech names that led the bull market of the past 10 years.
In the past century, the S&P 500’s total annual return has been 10.2%. In the past 10 years, it’s been 12.7%. We had a long bull market, and we could easily see years of sideways. This could very well just be a bear market rally that we’re in.
The big equity gains in ‘20-21 and losses in ‘21-22 were driven by big moves in yields. What if the big moves in yields are over?
In prior cycles, stocks and bonds tended to move in opposite directions. Now they’ve been moving together (ie. a shift from easing cycles to a tightening cycle).
These points are not meant to be predictions, I’m just setting low expectations. The last couple points about yields leads me into the next section.
In last week’s post, I discussed how yields and various yield proxies were breaking out, or at least showing resilience. But I’m open to the idea of a failed breakout in bond yields.
After all, the 2-year Treasury Note is on long-term support while commercial hedgers are extremely bullish on these bonds (as well as bonds of other maturities)!
Bonds firming up is consistent with stocks continuing their rally. SPY and IEF have been tightly moving together for the past 18 months:
Let’s expand on the intermarket to include more assets.
During the first 9.5 months of last year, while stocks and bonds fell, copper also fell. Meanwhile, the US dollar and oil were up (see below-left). But from mid-Oct to mid Feb, it was the opposite (see below-right).
This week, it was a return to the prior move: Oil & USD went up, while SPY, VEU, CPER, and TLT all finished the week down.
The weight of the evidence suggests that the move off the Oct lows may not be finished yet. I’ve already presented the bullish points for stocks and bonds in this post. I’ll talk briefly about materials.
Copper has been highly tied with emerging markets. It’s currently sitting on 18-year support:
Right here, I’m eyeing the potash companies (NTR, MOS) as they are coiled tightly and were up this week in a largely red tape.
While I remain bullish on stocks, I am setting realistic expectations. Patience and following relative strength will be key to producing returns in this market. And I still like the idea of having some of the portfolio earning 5% risk-free.
I’ll leave you with a collection of recent 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.
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.