Back to the Future

Some weeks ago, before the annual Leafs' golf season commenced, I mentioned the possibility of a leadership change in the stock market. I postulated that we could determine the new leadership from the relative strength shown during the correction. I had assumed that the mini-bubble in big-cap tech stocks would unravel, giving way to better performance from other sectors, such as financial and materials stocks.

As I often say, I am my best critic. I grade myself quite harshly. I'm giving myself a C+.

I got the first part of the trade right. The downdraft that crescendoed on Monday, April 22nd, saw the Magnificent Seven do most of the correcting. The drop was disproportionately focused on the likes of Apple, Tesla and Nvidia. But dear reader, that was only what looked like profit-taking. They have all bounced back ( a classic Tuesday at 11 turnaround ) and are leading the market advance that is now over two weeks old. But is the thesis of leadership change dead? Are the last two weeks noise or signal?

The two charts I'm watching:

Financials vs Technology

Materials vs Technology

As I read these charts, the case for a durable leadership change isn't dead, only delayed by a sharp pullback. The 'up' arrow is aspirational and not validated by any move higher in the longer-term moving average. We didn't get the turn I had been hoping for. One weak data point - Non-farm Payrolls - was seemingly enough for the FOMO growth crowd to get back in the game. Unfortunately, we need more weak data for a true leadership change to take hold.

Not surprisingly, I blame the Fed. They are messaging a wait-and-see approach to monetary easing. And that easing is holding back the rotation to new leadership in the financial markets. Markets need to see the whites of their easing eyes. Last week, bullish bets on past leadership were quickly renewed, as Apple and Tesla bounced hard and Google made new highs. Nvidia has rallied $125 since the low. Two years ago, it traded at that price!

So now I'm left with hope as a strategy yet again. I hope that the Fed sees and responds to the softness in consumer confidence and weakening creditworthiness. I hope that the housing mortgage stalemate will break and, with that, produce lower owners' equivalent rental costs. I hope that food and energy prices don't reaccelerate, paralyzing the Fed into inactivity. But our feckless Fed friends are cautiously waiting. Perhaps they are still on a mission to regain lost confidence from market participants still stinging after the 2021 'transitory' debacle. That makes me a bit less hopeful, especially if the wait is too long. Hope could quickly be replaced by fear of a hard landing.

In the aggregate, the market has yet to shake off the narrowness of the last 6 months. That is shown below by the inability of the 'average' stock to beat the larger capitalization leadership. The RSP ETF weights are a fixed amount that gives the 500th stock in the $SPX the same weighting as MSFT. I believe this is the best way to confirm a turn for the cyclical economic expansion. It ain't happening yet.

S&P 500 ETF: Equal Weighted vs Index

So, the playbook would be a return to my 'Sell in May and go away' call. I am not a fan of rallying to new highs on the back of old leadership. That will expand the valuations and create a dangerous concentration just as a peak seasonality condition occurs. Current Fed policy seems unable to bend the curve of risk appetite, as the stock market continues to put too much money into too few stocks. They are slowly tightening the economy, but the risk markets don't seem to care.

So, once again, it's back to the future, however uncertain.

Risk Model: 4/5 - Risk On

Suppose they gave a rally, and nobody came? That's what it feels like. Volume was pathetic last week, and the Chaiken Money Flow Index—a measure of the plurality of buying pressure—was lagging badly all week. This week's AAII bull/bear data will be critical in determining true investor risk appetite. So far, this rally smacks of a FOMO-style short-covering based on a more salubrious monetary narrative from Chair Powell. Given the impending election, he's increasingly looking like someone painted into a corner and may not deliver on that hopeful boost unless the data whiff even harder. And how will an overbought, narrow market like that?

It is suspicious when one of the 'reasons' for the rally is a monstrous buy-back by Apple and a China 'deal' by Tesla. Neither press release gives me confidence that more phones or cars will be sold anytime soon. I'm still using my old iPhone X until the AI version comes out. And as for the EV markets, I have even bigger doubts. Last week, my test drive of the Audi eTron Q8 left me feeling unimpressed. The battery range indicator dropped by a full 15 km within a half-kilometer of driving from the dealership. I seem to remember VW fudged some numbers once before. I'm sticking with the old Q7 with its 1,000 km rating, thank you very much.

S&P 500 ETF