Investing Update: Bull Market or Bear Rally?
What I'm buying, selling & watching
All three major U.S. stock indicies just experienced their worst week since March. This comes after a very nice run upward. The S&P 500 broke its five-week rally, its longest since November 2021. It still remains up 14% this year. The Nasdaq snapped its eight-week winning streak, its longest since March 2019. Still up 30% so far this year.
Just how good of a start to the year has this been for the S&P 500? Let’s try the best start to a year since 1997. 26 years!
When we look at technology stocks, they're on pace for their best first half since 1999. They’re on such a run that I wonder if investors start to take some profits after such a giant rally.
Then as Ryan Detrick points out below, a strong first half usually means a strong second half.
Jurrien Timmer makes an excellent point about retracement levels regarding his chart below.
Bear-market rallies generally do not retrace more than half of their preceding declines. The S&P 500 cap-weighted index has retraced 64% of the 2022 decline, exceeding all previous bear-market rallies since the 1920s. Technically, from a purely historical perspective, it’s getting more difficult to call this a bear-market rally.
If we are in a new bull market, it sure isn’t a normal one. Nick Maggiulli took a look back at the positive years for the S&P 500 and what percentage of stocks were responsible for the gains.
2017: 203 stocks (40%) accounted for the index’s gain.
2019: 328 stocks (65%) accounted for the index’s gain.
2020: 60 stocks (12%) accounted for the index’s gain.
2021: 258 stocks (52%) accounted for the index’s gain.
2023 (through May 31): 7 stocks (~1%) accounted for the index’s gain.
But we’re starting to see the percentage of large cap stocks above their moving averages continue to climb. So under the big 7 stocks there are a number of stocks that are also starting to do well.
If the rally can continue widening and everything starts moving higher to follow the big seven tech stocks, the bull market will run. If not, the market may be in no man’s land and the rally may fizzle. Setting this phase up as a possible bear market rally.
Mike Wilson vs Savita Subramanian
This week saw two of the top strategists on the street voice their views on where they think the market is headed. Mike Wilson and Savita Subramanian are two who when they make comments on the market, I listen.
First, Mike Wilson the top equity strategist at Morgan Stanley who was one of the first to correctly predict the previous bear market. He’s still very firmly sticking to his call for the bear market to continue.
Bank of America top equity strategist Savita Subramanian was a guest on CNBC and the headline of her segment was Savita is more bullish than she’s been in a decade. Here are some quotes from her interview on CNBC.
The market is more rational than its been in a decade.
AI is complicated but it's not just a tech story, which is what's exciting about it. It's the idea that companies that have been clunky and haven't really fixed themselves in a long time, have the opportunity to get leaner and lighter.
Companies are going to have to spend on AI just to stay alive. Tech companies are going to spend on AI, old economy companies are going to spend on AI, everybody is. So it's not just a one-theme market.
AI is just part of this whole efficiency, automation, 'doing more with less' theme that I think is going to be really bullish for corporate margins.
There are parts of the S&P 500 that look incredibly attractive and the thing that's obscured by mega caps is if you take out the 50 biggest stocks the PE of the S&P 500 x 50 is 15 times trailing earnings which is actually relatively low.
There are value opportunities but they're right now being obscured by this sort of AI bubble.
Talk about two completely different bold views on the road ahead for the market. You can see the rational in both of their analysis.
If This Is Another Bull Market, Be Invested
As the below chart shows if this is indeed the start of a new bull market, things have ways to run. The first year of new bull markets have averaged a return of 43%. With an average return like that during the first year of a bull market you can see why you hear about the catch up trade and money chasing this rally. They’re aware what’s coming and if you’re underweight or not in stocks you miss another big run.
Investors Way Underweight Stocks
When I speak about the catchup trade or having to chase as the market goes higher, the below chart illustrates the point perfectly. We’ve known how underweight investors have been to stocks. This shows how wide that gap is and all the ground that would have to be made up.
The 60/40 Portfolio
The traditional 60/40 portfolio was left for dead following a disastrous 2022. I’ve said what works one year may not work the next and vice versa. It’s all apart of positioning and rotation. So far in 2023 the 60/40 portfolio has roared back.
Chart of the Week
This was my favorite chart of the week. Very interesting to see the companies under each sector and just how big of a percentage they are. To see the listing up close, I suggest going directly to the site here.
Moves I’ve Made
CrowdStrike CRWD 0.00%↑ This week I added to my position in CrowdStrike at $144. This has been a buying point for me. I started adding at this $144 level in October. Then I added at $123 in November after a steep selloff. Then again in April at $122. As it hit $144 again this week, I decided to add more.
The stock is down 10% in a week. It still remains down 50% from its all-time high. I’ve spoken numberous times on the importance of cybersecurity moving forward. You can read about it in these past Investing Updates.
Investing Update: Insider Buying Returns (4/29/23)
Investing Update: I Went On a Buying Spree (11/12/22)
Investing Update: What’s Price In? (10/15/22)
CrowdStrike is my pick in this space over Palo Alto Networks PANW 0.00%↑, Zscaler ZS 0.00%↑, Fortinet FTNT 0.00%↑ and the Global X Cybersecurity ETF BUG 0.00%↑. I also thought they had very good earnings at the end of May. Here are some of the numbers from those earnings courtesy of
and .
What I’m Watching
The supply of new homes continues to drop. As the chart below shows, the number of active homes for sale hit the lowest level on record at Redfin. It began tracking beginning on 2012.
I wrote about the current housing situation last week, Are Home Prices Headed Even Higher?
The big winner from this all continues to be the home builders. The iShares U.S. Home Construction ETF ITB 0.00%↑ just keeps going higher. YTD it’s up 34% and in a year up 54%.
What still has been lagging are the home improvement retailers, Home Depot HD 0.00%↑ and Lowe’s LOW 0.00%↑. I own shares already in Home Depot but am looking to add even more. I mentioned when I started my position that I may be early. Investing Update: Buy in May and Stay
This month my business has noticed an uptick in home equity lines of credit. We’ve seen people start making improvement and changes to their houses. I stopped by a Home Depot and they agreed. But they did mention that seasonality is a piece of this as the warmer weather spurs home improvement activity. Especially here in Wisconsin. The specific manager I spoke with has been here for seven years and there had been an extended lull but they’ve been slammed of late.
I continue to believe that with no supply of homes available for sale, that people are going to put money back in their home. They’re going to look at mortgage rates which are hovering around 7% and look at their current mortgage interest rate which is likely around 3% and say no thanks. Let’s fix and improve where we’re at.
The Coffee Table ☕
Nick Maggiulli wrote The Bulls Are Back In Town. Numbers Nick put some great numbers in this piece on how unique and rare this start to a bull market would be. In typical Nick style he has a lot of numbers to go with it to back his points.
Uber CEO Dara Khosrowshahi was on the Acquired podcast. If you’re interested in what’s going on at Uber and how Dara has led a drastic turnaround this is a great listen. He also talks about the behind the scenes that led him to leaving Expedia for Uber. I’m very bullish on Uber and have been invested in Uber for a long time.
Bob Elliott wrote an interesting post, Hedge Funds Cautiously Tilt to Higher for Longer. By his charts and data he points to hedge fund positioning as being prepared for higher rates longer. He looks at hedge fund asset classes, equity and sector positioning. Some good data points in here and it’s always interesting to see where the hedge fund consensus is at.
A few weeks ago at while at a local liquor store, another customer was in talking with the owner about his favorite bourbons. When he was said two of my favorites I had to strike up a conversation. I gave him a new one to try and he gave me this to try. Starlight VDN Finished Small Batch Bourbon. It’s a younger aged bourbon but has loads of flavors with orange peel, vanilla and cinnamon to me. Extremely smooth and a very impressive bourbon. This now has a spot on my bourbon shelf.
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion. Do your own research.