When Will Market Bears Finally Switch Sides?

The stock market finished the week, month, and quarter on a very positive note. The S&P 500 was up 6.5% for the month a bit better than the 6.3% gain in the Nasdaq 100. Both have been higher for four months in a row.

The three higher quarters for the S&P 500 were capped by an 8.3% gain in the past quarter. The Nasdaq Composite was up an impressive 12.8%. For many these impressive gains are likely disappointing to those who have not invested in the stock market.

In the January 16^th post “Are Wall Street Strategists Too Negative?” I commented that the year S&P 500 target of 4078 reminded “ me of 2017 when the average year-end target was 2368 but the S&P 500 closed at 2673.” The widespread fears of the recession were mainly tied to the inverted yield curve.

There was also a dominant view that earnings forecasts were too high as a NY Times article commented that “The analysts who forecast the fortunes of corporate America have rarely been more pessimistic at the start of a year than they are in 2023.”

For someone who does not base my market outlook or stock recommendation on earnings, I felt that this negative earning sentiment was actually a positive for the stock market. As it turned out earnings so far this year have been stronger not weaker than projected.

So what’s ahead for the next quarter?

Let’s look at the data as in my opinion, it is the most important not the future forecast of earnings or the economic forecast based on fundamental analysis. Could the year-end target of 4078 still be reached by the end of the year? Of course, it could but

A weekend article in Bloomberg revealed that some of the most bearish strategists are still negative. The authors concluded that “Bearish and wrong is ‘worst place to be’ “. Many fundamental strategists do not use stops to objectively determine when their outlook is wrong. For most technical analysis stops are a key tool to help avoid being on the wrong side for too long. Before a significant market correction, there should be warnings from the technical studies including the market internals.

In last week’s trading on the NYSE, 2487 issues were advancing and 637 declining. These numbers supported last week’s gain in the major averages, so there are no warnings yet.

The Dow Jones Transportation Average led last week with a 5.7% gain followed by the 3.7% rise in the iShares Russell 2000. The S&P 500 gained 2.4% as it outperformed the 2% rise in the Dow Jones Industrial Average and the gain of 1.9% in the Nasdaq 100.

The SPDR Gold Shares were unchanged for the week with the Dow Jones Utility Average ($UTIL) up 0.5%. On a year-to-date (YTD) basis only $UTIL is lower so far this year.

The Spyder Trust (SPY
PY

SPY
has reached its highest level since the April 2022 high of $457.83. The all-time high of $468.78 is just 5.75 % below Friday’s close. The monthly starc+ band is at $487.25 with the 1.272 Fib extension target at $516.11.

SPY has not had a weekly close below its quarterly pivot since October 31^st, 2022. The 3^rd quarter pivot levels to watch are included on the chart with the pivot at $430.83 and the R1 not far above current levels at $457.13. If it is overcome the R2 is at $470.99.

The monthly S&P 500 Advance/Decline Line has closed the month at an all-time high. This indicates that SPY will also make a new high. This may not occur until after there is a correction.

For the week value-led growth by a slight margin as the iShares Russell 100 Value (IWD
IWD
) was up 2.83% while the iShares Russell 100 Growth (IWF
IWF
) was up 2.20%. The weekly analysis on the IWF/IWD ratio appears to have peaked in terms of momentum but a top has not yet been confirmed. Last week’s performance in the IWM
IWM
and Dow Jones Transportation Average does favor value.

The monthly chart of the Invesco QQQ
QQQ
Trust (QQQ) does look strong. The March 2022 high at $371.83, line b, has been reached. The new quarterly R1 is at $391.55 with the monthly starc+ band at $398.03 which is 6.75% above the close. The new QPivot is at $350.72 which is 5.9% lower.

The monthly Nasdaq 100 A/D line closed the week above its WMA with the weekly and daily also positive. The weekly A/D line is still lagging prices. The monthly relative performance (RS) was a bit lower in June but is well above its rising WMA consistent with a market leader.

The monthly relative performance (RS) dropped below its WMA in January 2022, line a, indicating it was going to be weaker than SPY. The RS moved back above its WMA in March, line c. The daily and weekly RS turned positive in January indicating QQQ was again leading the SPY, making it a favored sector.

Before last week’s stock market surge some of the market bears were looking for a correction. In my experience, this often occurs ahead of the actual correction. Early in 2023, I thought it might take a move in the S&P 500 above 4250 or 4300 to convince a majority that the trend has changed. That has not been the case as it may take new all-time highs.

The monitoring of the RS analysis will be critical this quarter to identify new market leaders. In the next week, I will take a look at the stocks and ETFs that showed up in my monthly scan. They should be the best bets for the 3^rd quarter.