The week in review, last week of June 2023

The week in review

I’ll be posting a weekly review of the market, the good, the bad and the ugly, reviewing the market from multiple points of view:

• Technical
• Fundamental
• Sentimental
• Institutional
• Macro
• Value investing
• Short term view
• Long term view

The most important factor nowadays is liquidity, the market is being driven by the Federal Reserve.

Liquidity as a key factor in the market, that changes in the Federal Reserve’s balance sheet explain 51% of the S&P 500’s rise, while corporate earnings only account for 23% of the market’s gains.

Shadow liquidity:

Notable news

News and data that move the market:

• U.S. annual PCE price index (May): 3.8% (Forecast 3.8%, Previous 4.4%, Revised 4.3%)
• Monthly PCE 0.1% vs 0.1% expected. Previous 0.4%.
• Core annual PCE 4.6% vs 4.7% expected. Previous 4.7%.
• Core monthly PCE 0.3% vs 0.3% expected. Previous 0.4%.
• U.S. Consumer Spending Monthly (May): 0.1 % (forecast 0.2 %, previous 0.8 %)
• JP Morgan: There has been an $800 billion increase in the U.S. national debt since the debt ceiling was suspended just a few weeks ago.

Good inflation figured are fueling the market.

Institutionals

I’ll be discussing the institutional view of the market, what are the big players doing, what are they saying, what are they buying and selling. Harnett from Bank of America, Goldman Sachs, Kolanovic from JP Morgan, Morgan Stanley, McElligot from Nomura are some of my favorite institutionals. Other hedge fund managers I like includes Stanley Druckenmiller, George Soros, Warren Buffet, Paul Tudor Jones, and Bill Ackman.

I’m taking notes on what they say and do and figure out if they were correct or incorrect in the future.

• UBS joins Goldman and Morgan Stanley and also cuts China stock outlook.
• Euro zone inflation expectations gauge plummets to seven-year low.
• Berkshire Hathaway increases its stake in Occidental Petroleum to 25%.
• Goldman: We believe the S&P 500 will rise 7% over the next 12 months.
• Office occupancy in New York and Los Angeles remains at just 50% of pre-crisis levels and in San Francisco is even lower. Public transit in major cities remains down more than 30% from 2019 levels. There are so many return to office news… but the numbers talk!
• The BofA Bull & Bear indicator falls to 3.2 from 3.4 due to slowing corporate bond inflows and deteriorating equity market breadth.
• HSBC: The next U.S. recession scenario will look more like the recession of the early 1990s, with our central scenario being a 1-2% reduction in GDP.

The good

Many positive developments are taking place in the market, which I am going to cover here.

The AI narrative remains compelling. And artificial intelligence is a fact that is here to stay. However, it has the potential to become a bubble

• July is traditionally a favorable month for the market. I don’t see any signals of a bear market yet, and the market is still positive. I’ll be on the lookout for signals of a bear market and will publish them here.
• The market remains bullish, and I see no symptoms of a bear market. I’ll be on the lookout for signals of a bear market and will publish them here.
• Interest rates can rise, but not too much or too quickly; inflation is declining and appears to be under control. When inflation is excessive and then slows, the market normally rises.
• The euro zone inflation expectations indicator hit a seven-year low this week.
• Since M2 is still rising, the market may continue to rise.
• The first half of the year was fantastic, and the second half of the year is usually good.
• We continue to see good earnings surprises.
• From a technical point of view, the market is still in a bull market. The continuation of the bear market will be an anomaly.

The bad

What are the dangers?

• The market’s long term value is high, but it may go higher.
• A few stocks (A.I. mainly) are outperforming the market, while the others are underperforming or plain flat.

The market is currently discounting positive economic data and expecting a soft landing without a recession and a decrease in inflation. There is a high chance of disappointment and retracement.

The ugly

There will always be reasons to be bearish, and I will keep looking for them and post them here.

• Macroeconomic data is mixed; inflation is high but slowing, and the economy is growing but not as quickly as projected.
• The interest rates curve inversion predicted a recession in 2023, or is it predicting that the FED has beaten the inflation?
• Many short term sentiment indicators indicate that the market is overly bullish. But that might last for a long time.
• If we remove the top 28 values in the S&P 500, the market is negative this year.
• 20% unemployment in China, the maximum in history. While in US is the minimum.
• 20% inflation in food in UK.
• Corporate US bankruptcies have doubled from previous year.

Seasonality

July usually starts very strong and is overall a good month for the market.

Composite seasonal chart and current month chart:

These charts are different if we change the time frame and if we remove the outliers.

I’ll do more analysis on seasonality with multiple timeframes and removing outliers in the future.

Sectors

This weeks’ sector performance is:

Returns of the main sectors for the month of June:

The Year to day performance by sector is:

Overview

Strong gains on the last day of the quarter. Wall Street closes with the Nasdaq’s best half-year in 40 years.

Over the past 10 years, stocks have been higher 9 times in July and Nasdaq has had 15 consecutive green years in July, including 2008.

My view of the market for the next month is bullish. For the longer term, I’m still fairly bullish, but I’m cautious, I’d like to see earnings and macro improving.

Rallies in bearish markets typically last an average of 50-something days, with the longest one being 148 days in 1929. Given that the current rally has lasted for 240 days, it is highly unlikely that this is a bearish market rally.

Note: The main objective of the weekly review, is to come back and add charts and data to the post, so we can see how the market evolved over time and who was right and wrong.