Both of the major indexes have continued their macro trends higher, or at least, not lower after another week of consolidated trading. However, since October bottoms, the buying pressure has remained robust, even despite gray clouds that loom over the economy. An encouraging sign that supports this sentiment is a golden cross (the 50-day moving average crossing up through the 200-day moving average) has developed for both of these indexes. That in itself doesn’t mean higher prices are ahead, however, until that signal is broken, investors should expect this positive trend to continue a bit longer.
That said, the next major hurdle for the S&P 500 will be getting back above the 20-month moving average (teal line shown below) for two consecutive closes, which would increase the likelihood the bear market we were in may finally be over for good. However, this would require a monthly close above 4220 to confirm.
(Source: TC2000.com)
The market is now setting up for a slate of earnings reports from some tech giants like Meta (META), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), which could set the stage for another leg higher or a reverse. Tesla (TSLA) disappointed last week when it noted that it was willing to chase additional market share at the expense of short-term margins, however, the reports set to be released this week will be a much better determinant of market direction.
In addition, we should get a better gauge of consumer health when companies like McDonald’s (MCD), Crocs (CROX), Dominos Pizza (DPZ), First Watch Restaurant Group (FWRG), and several homebuilders report over the coming two weeks.
Assuming earnings from Big Tech and large-cap retail names are solid, this could push the market towards its first major resistance level at 4315 on the S&P 500. Hence, this week and the next couple of weeks will be pivotal for the market.
Valuation & Sentiment
From a valuation and sentiment standpoint, we’ve seen little change from the prior week. Valuations have continued to remain in neutral territory overall and most sentiment indicators also on neutral readings. These neutral readings are based on the market not being expensive, but not overly cheap either. Sentiment has been evenly divided between the bulls and bears with the elevated pessimism levels from March during the brief banking crisis dissipating.
In fact, as the chart below shows, put/call readings have dropped to their lowest levels in months, the opposite of December/January when it was a great time to start putting capital to work in undervalued names.
(Source: Multpl.com, Author’s Chart)
(Source: CBOE Data, Author’s Chart)
Action Plan
As discussed in past updates, we saw a very rare breadth thrust on January 12th that occurs when the advancers/decliners ratio (summed 10-day average of NYSE advancers/decliners) goes above 1.98, which takes extreme buying pressure to occur. The success rate of this indicator is well documented, so it requires that we continue to take it into account until the point at which it is invalidated. This rare signal overrides valuation and sentiment and continues to point to a bullish bias for the market over the next nine months.
(Source: Market Data, Author’s Table)
That said, because these readings aren’t confirmed by bullish readings for valuation/sentiment indicators, I’ve continued to be only 70-75% invested given that it’s more difficult to have conviction on short-term market direction, even if the intermediate bias is higher (6-12 months).
Plus, the market remains in the upper portion of its short-term support/resistance range (3765-4315), resulting in a balanced reward/risk profile for the market heading into the week.
So, while I would gladly add exposure to my position in the S&P 500 ETF (SPY) if we were to pull back below 3800 and closer to short-term support, I don’t see a compelling enough reason to be aggressive at current levels.
(Source: TC2000.com)
However, there are always opportunities out there if one is willing to sift through the rubble and look for sectors that are out of favor temporarily or names that are undervalued relative to their peer group.
In this week’s update, we’ll look at a medical devices stock that is trying to break out of its long-term downtrend and that has been unfairly punished by the market, given its impressive growth rates. This company is InMode Ltd. (INMD), a mid-cap medical devices company that was founded in 2008.
However…
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