Will The Week Ahead Validate The Bear’s Case?

The computer glitch at the NYSE on Tuesday was forgotten by the end of the week. It was another good week for the bulls with the averages showing nice gains. The overall market moved higher despite the negative earnings stories from a few companies.

In my analysis, it is the price action and volume that are more important than whether the earnings or revenues meet expectations. Often a stock will move higher on an earning’s miss or move lower on an earning’s beat which can frustrate investors who try to rationalize the response.

Many who think this market rally cannot last point to the high recession risk indicated by the inverted yield curve as well as their conclusion that earnings forecasts are too high and do not reflect the true state of the economy. This week’s earnings from Apple
AAPL
Inc. AAPL), Alphabet (GOOGL), Amazon.com (AMZN) and Meta (FB) should test their view.

The FOMC announcement on Wednesday as well as several key economic reports may clarify some views on the health of the economy. Stocks were helped on Friday by the better-than-expected Consumer Sentiment data and the decline in the personal consumption expenditures price index that helped to lower inflationary expectations while boosting stocks.

For the week, the Nasdaq 100 Index rose 4.7% and is the clear year-to-date (YTD) winner as it is up 11.2%. Both the S&P 500 and iShares Russell 2000 had decent gains of 2.5% for the wee and solid YTD gains.

The Dow Jones Industrial Average was up 1.8% and did much better that the Dow Jones Transportation Average of the Dow Jones Utility Average ($UTIL). The $UTIL is flat YTD and it is the only one of the markets that closed below its 200 day MA (in red).

The SPDR Gold Trust (GLD
GLD
) was down 0.1% for the week but is up 5.7% YTD. Both GLD and the VanEck Gold Miners (GDX
GDX
) have had a good run since the positive signals in late November.

The NYSE Composite had a gain last week of 1% which helps confirm the break of the downtrend, line a, three weeks ago. The Friday close was above the 61.8% Fibonacci resistance at 15,851. The 20 EMA is rising at 15,288. The next targets are at 16,500 and the weekly starc+ band at 16,660.

It was a strong week of the market internals as on the NYSE there were 2406 issues advancing and 906 declining. Since late December there have been signs of strength in the NYSE All Advance/Decline line (point c) which was consistent with a more broadly based stock market rally. The A/D lines surged last week to move further above the downtrend from the early 2022 highs, line b.

The technical outlook for the S&P 500 also improved last week as the close was just below the December high at 4100.25. There is more important resistance at 4325, line a, and a weekly close above that level would be very positive.

The American Association of Individual Investors (AAII) survey did not show any significant changes last week with the AAII bullish % dropping to 28.4% from 31%. I still think that a move above 34%, line a, could indicate an important shift in the sentiment.

The latest reading from the NAAIM Exposure Index shows that it rose to 75% last week. That is the highest reading since the spring as the resistance at line b, has been overcome. The S&P 500 A/D line made a new rebound high last week confirming the move above the downtrend, line c.

Despite this encouraging action, most data indicates a majority of Wall Street pros are not convinced the rally has staying power. A recent note from the Bank of America
BAC
pointed out that there is $4.8 trillion in money market funds. Their survey of global fund managers found their “cash holdings have had their biggest fall since June 2020, dropping from 5.9 percent in December to 5.3 percent this month.” At past market tops the cash levels have dropped below below 4%.

In June 2020 the stock market was turning higher after the market crashed in the spring of 2020. The survey also reported the allocation to U.S. stocks was the lowest since October 2005. These fund managers like EU shares and emerging markets but not U.S. tech shares.

The S&P 500 close last week at 4070.6 was just below the average year-end target of 4078 strategists polled by Bloomberg. The year-end target for the Stoxx 600 from European strategists at 452 was exceeded last week as it closed at 455.17. A few have already raised their Stoxx 600 targets, and I would expect the S&P 500 targets to be raised by the end of the 1^st quarter

Despite the sharp rally since the start of the year, there have been some sharp but brief pullbacks. These have created some good opportunities for new investments. I would expect to see more in the weeks ahead. Given the current readings from the advance/decline lines buying the dips is the right strategy for now.