2023’s Scorching Hot Start
Regarding the U.S. stock market, 2023 has been the polar opposite of 2022. 2022 saw the stock market steadily trend lower, while technology, biotech, and small caps led the way down – meanwhile, slower-moving “safer” stocks outperformed. Thus far in 2023, tech is once again leading the market (this time higher) as a risk-on mood returns. In fact, the Nasdaq 100 ETF QQQ is up 13.10% year to date. Electronic vehicle maker Tesla TSLA is up a mind-blowing 100% since hitting lows last month (yes, you read that right).
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Meanwhile, Cathy Wood’s Ark Innovation ETF ARKK, which rose to superstardom during the last bull cycle only to be crushed in 2022, is up 34% in 2023.
Can the Strength on Wall Street Continue?
While the solid start for 2023 is a welcome sign for investors, the key is to look forward. In the short term, there are some signs that the market may need to pull back or digest gains at the very least, including:
- Sentiment: Two of the most followed sentiment indicators show signs that bears that may have overstayed their welcome are capitulating. The CNN Fear & Greed Index, a sentiment gauge that combines seven different indicators to distinguish what “emotion” is driving the market, has flashed a “greed signal” for over a month. The American Association of Individual Investors’ (AAII), another closely followed sentiment gauge, recently flipped from bears making up the majority to bulls making up the majority. This week marks the first consecutive two-week stretch in which bulls outweighed bears in more than one year. While the sentiment indicators should not be used in a stand-alone manner and are not a timing device, the data should raise investors’ antennas. As legendary General George S Patton once warned, “If everyone is thinking alike, then somebody isn’t thinking
- No Market Goes Straight Up: How strong have stocks been? The tech-heavy Nasdaq 100 Index ETF is up 6 out of 7 weeks thus far in 2023. While market leaders like Tesla haven’t shown any signs of slowing yet, they are reaching frothy-like levels. Tesla is up every single week this year but is now approaching the underside of its 200-day moving average – an area where it broke down from in late 2022.
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Conversely, many stocks, such as Meta Platforms META and Fastly FSLY, have seen strong moves post-earnings. While it is overall a positive development to see investors applaud earnings for a change, some digestion after such significant moves is warranted.
Image Source: Zacks Investment ResearcThe 50-day moving average tends to act like a bungee cord. When stocks get too stretched, they usually must pullback through price or time so that the moving average can catch up.
- Late February Seasonality: Though U.S. stocks tend to march higher over the long haul, late February has been a rare weak spot over the years. Since 1950, the second half of February has been negative on average. After the blistering start the major U.S. Indexes have had thus far, a pullback or sideways digestion would make sense at this juncture.
Conclusion
Knowing your time frame is a critical attribute investors need to navigate the market successfully. Stocks have had a multi-week run, we are in the middle of a seasonally weak period, and sentiment is getting hot. For short-term investors, now is not the time to chase. On the contrary, mid to longer-term investors should stay the course. U.S. stock markets rarely have two consecutive down years, the pre-presidential election years tend to be the strongest from a seasonality perspective, and longer-term bullish technical indicators are triggering. For example, the S&P 500 Index ETF SPY, just flashed a bullish “golden cross.”
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Regardless of the time frame, a pullback here should be welcomed by investors to work off excess bullishness and set up new buy zones. As always, patience is a virtue.
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