Broadening Out: The Expanding Market Breadth

Jeff Buchbinder (00:00):

 

Hello everyone, and welcome to another edition of LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Adam Turnquist. Adam, we switched up the order a little bit this week. Not only that, we switched up the time of our recording, so it is actually Friday, July 21, 2023, as we're recording this. I know you are nimble enough to handle it. <Laugh> it wasn't even your turn in the rotation. And here you are. Thanks for joining.

 

Adam Turnquist (00:30):

 

Yeah, thanks for having me. You can put me in coach, anytime. So glad to be here. Happy Friday.

 

Jeff Buchbinder (00:36):

 

Love it. Love it. So here's our agenda for today. We have well, because it's Friday as we're recording this, the market just opened. We don't have full week statistics, so we'll do an abbreviated weekly market recap. But I think what's really interesting is how the value sectors are at the top of the leaderboard so far this week. That probably won't change based on what we're seeing here on Friday morning. Next chart check. Of course, Adam's our chart guru. So, we're going to look at some charts and I think the theme of the charts this morning is around participation broadening out, which is a really good story. We think that we've got to pass the leadership baton from mega cap tech to the rest of the market to keep this thing going. Next of course, we're right in the middle of earnings season, so we'll give you a quick update there.

 

Jeff Buchbinder (01:29):

 

It's still early so we're not going to pay too much attention to the specific numbers. But we'll try to highlight some themes that have emerged from some of the companies that have reported thus far, primarily the banks. And then last preview the week ahead and it's Fed week. But not just that we got GDP and the Feds preferred inflation metric. So a lot to talk about for the week ahead. So let's get into it. First here's your weekly recap. The first thing that jumps out to me, you know, we're up a little bit this week. It's not a huge up week. It's been enough for the Dow to gain nine straight sessions, but you know, about three quarters of a percent, two thirds of a percent on the S&P 500 this morning, week to date.

 

Jeff Buchbinder (02:18):

 

But what jumps out to me is financials right at the top here. And certainly, a lot of financials have reported over the past few days. And so, this is, I think, a really positive sign that tells us that maybe you know, value can make a little bit of a run. Energy is next, next best performer. You're talking about almost a 3% gain week to date. That is a value sector as well. So, tough question to answer, Adam, but do you think this is the start of a turn toward value?

 

Adam Turnquist (02:50):

 

Yeah, potentially. I don't know if we can make that case technically yet, but I think it's hard to imagine a bull market without financials participating. So, like to see financials at the top of the leaderboard here, I think that's a good sign for the sustainability of this emerging bull market, we'll call it. And if you think about it coming into this week, communication services, consumer discretionary, very overbought. You had nearly a quarter of the stocks within each sector overbought based on their relative strength index, which is a momentum indicator that we like to look at. So not a major surprise that we're seeing some pullbacks there, especially getting dragged down a little bit by those mega cap components within those sectors.

 

Jeff Buchbinder (03:31):

 

Yeah, also interesting to see the big growth sectors toward the bottom of this list, right? And we had, we'll call it a mixed reaction at best to earnings from Tesla and Netflix. Those stocks sold off on those results. And so you've got the big leaders of the year, you know, potentially starting a little bit of a pause or consolidation if you will. Tech's been really interesting to watch this week because we have this NASDAQ rebalance, I guess special rebalance coming after the close today and over the weekend where the weightings of the biggest names in the NASDAQ 100 are going to be reduced. You've also got options expiration, so it could be a little bit of a volatile session here today as we close out the week. Next week's the big week for tech though, because we get Microsoft results, we get Alphabet's results, Meta, it's pretty much all the biggies except Apple and NVIDIA.

 

Jeff Buchbinder (04:36):

 

So, let's move on and do some chart talk. Adam, of course, this is your area of expertise, so I'll let you do most of the talking here, but I mean, I think, you know, most people have been a little bit surprised by how strong this market has been. And you know, if we, as we've broken through some of these resistance points and, you know, moved out to what, 15, 16-month highs, people are actually starting to talk about the all-time high, right? Yeah, around 4,800, which is not actually that far away, right? I mean, we're what, five, 6% off of that?

 

Adam Turnquist (05:14):

 

Yeah, right around there. And that's the one of the questions I'm getting. The other part of that question is probably number one question I'm getting from advisors and clients is, you know, how high can this rally go? Of course, that's the million-dollar question. If I knew that exact answer, I might be doing other things in retirement mode or something, but I'd still probably be looking at charts. But partially to answer that question, we can look at resistance and S&P 500 right now is coming into a pretty key area of overhead resistance, we'll call it 4,600 that goes back to the early 2022 highs. And of course, we're overbought, you know, myself is including into those people that are surprised by the strength of this market. You can see the S&P 500 pretty well extended above its sharp uptrend off the March lows.

 

Adam Turnquist (06:06):

 

And then on the bottom panel you can see how many stocks are overbought just based on their relative strength index. You're right around 18% as of this morning. And when you look back at that bottom panel, you know, when you get an inflection point, that percentage reading typically goes kind of this 25 to 30% range. That's implying that, you know, a quarter or 30% of the S&P is overbought based on RSI. That's what we saw back in August of last year. That's what we've seen at these other inflection points. So that's a number that I'm watching for next week to see how overbought the internals are getting. But when you think about the next question that I get is, if we do get any type of pullback from overhead resistance, you know, where could that land on the S&P 500?

 

Adam Turnquist (06:50):

 

What kind of drawdown are we talking? And I don't think it's going to be a deep one. Part of that theme is just the broadening out of this market. You know, we've talked so much about the mega caps driving all of the gains, and that was really the story until June. And that's when things started to broaden out a little bit more on the back of that soft landing narrative. And you can see in the middle panel of the chart that we brought today, just the percentage of stocks above their 50- and 200-day moving averages, clearly moving in the right direction. And then in terms of levels of, you know, potential drawdown points, I think you could use kind of the 4,200 to 4,300 range as a potential spot where you'd see a lot of buyer interest. There's a lot of support right in that range. That's where the longer term uptrend sets up and some prior highs as well. So that's kind of the upside and downside perspective right now from the technical lens here.

 

Jeff Buchbinder (07:44):

 

Yeah, count me as the potential buyer there if we go down to 4,200. I think, you know, the LPL Research year end fair value target for the S&P is still 4,400 at the upper end of the range. We're above that now, of course. So that really tells you that we're looking for weakness and then would potentially think about increasing our equities exposure at that time. So, we'll see, hopefully we're too conservative and keep going higher, but you know, right now our house view is certainly that we'll be kind of choppy and you know, maybe go sideways, maybe even a little bit lower. So, we got the advanced decline line next. I mean, a lot of people are saying that this market's not broad, it's just being led by seven companies. But this chart or these charts suggest that's really not fair, right?

 

Adam Turnquist (08:37):

 

Yeah, that commentary, I would say was valid until beginning of June. And this chart on the bottom panel shows the cumulative advanced decline line for the S&P 500. So just a simple index that we look at measuring the number of advancing shares versus the number of declining shares. So, when it's rising, clearly there's more advancers than decliners. And I like to use this one to either spot, you know, breakouts for validation of those breakouts or to spot divergences. And you can see going into June, we had a negative divergence, meaning the S&P 500 was breaking out, the advanced decline line was actually moving lower. That, you know, those gains were really driven by those, you know, whether it's the magnificent seven, elite eight, fabulous five, whatever you want to call it. But that started to change in June. You can see the advanced decline line followed the S&P 500 breaking out above its own August high. So, giving more confirmation of the S&P 500's rally, speaking to just how things have broadened out a bit more. So certainly, more evidence, you know, for the validity of this bull market.

 

Jeff Buchbinder (09:46):

 

Yeah, I mean, this fits with our story about maybe a little bit of a shift toward value, a little bit of a shift away from mega caps. It's not that we expect the mega caps to implode here. Not at all. Just the bar is pretty high during earnings season for the mega cap rally to continue. And we probably are due for a pause. So, continuing on this theme, right, Adam, one way to, you know, look at whether the average stock is doing well is look at the equal weight index for the S&P 500 and you know, this looks like a pretty good chart to me.

 

Adam Turnquist (10:22):

 

Yeah, certainly had quite a bit of improvement here over the last, call it six, seven weeks. You can see going into early spring there was a pretty big divergence between the S&P 500 market cap weighted. And then this S&P 500 equal weight index, you can see it was actually trending lower until it finally found support off that longer term uptrend. Since then, we've made a lot of technical progress here on this equal weight index, we've cleared the August highs, and now we're getting back to resistance around the February highs. So, we're talking about a potential 52 week high on the equal weight index. Can see on the bottom panel we're showing the momentum indicator, the MACD indicator moving higher in a buy position. So again, suggesting we might get that top side breakout. And when you think about the composition, you know, when you equal weight things, this is taking down the technology sector weighting, increasing the industrial sector weighting. Industrials have been a big driver of this broadening of the market and really outperforming since June. And I think when you just step back and look at what's the message here for investors, it's that the average stock is doing quite well and that wasn't the case, you know, in call it the April or May timeframe. I think that's a pretty bullish message for the broader market as well.

 

Jeff Buchbinder (11:44):

 

Yeah. And at one point, something like 80%, 80, 90% of the S&P's gains were from the top seven. I think that's clearly not the case over the last couple of months. So, that is good. We want broadening out, it's healthy. And then the MACD you know, in layman's terms, that's just a measure of momentum, right Adam? What should people know about the MACD if they're not familiar? The moving average convergence divergence.

 

Adam Turnquist (12:12):

 

There you go. Yep. Stands for moving average convergence divergence just looks at you.

 

Jeff Buchbinder (12:16):

 

Not bad for a fundamental guy, huh?

 

Adam Turnquist (12:18):

 

Yeah, it's pretty good. I'm impressed. <Laugh>. It just looks at the difference between two exponential moving averages and how they're lined up, you know, when they shorter term above a longer term, simplistically, you know, that's bullish. There's some more metrics that go into it, but for the sake of today's podcast, I'll keep it simple, but that one's in a buy position and moving higher, suggesting that momentum, you know, may continue there for the equal weight index.

 

Jeff Buchbinder (12:46):

 

Excellent. Another way to look at the same thing is to look at the ratio of the equal weighted index to the regular market cap weighted index. So, what is this telling us?

 

Adam Turnquist (12:56):

 

Yeah, so I zoomed way out on this chart just to give it some more perspective. And you can see on the top right, the equal weight versus S&P ratio chart is right at support off the 2021 lows. So that's going to be a key level of support to watch. And just as a backdrop, so when this ratio chart is moving higher, that means the equal weight index is outperforming the S&P 500 and vice versa. What's notable, I think, on this chart, especially from a longer term perspective, is just the degree of outperformance recently, you know, with the S&P 500 outperforming the equal weight index. And that's depicted on the bottom panel, just the rate of change, and we're historically low in terms of that rate of change. You can see, you know, on a 30 plus year basis, you know, this eight and a half percent rate of change that we're at right now, that's really marked an inflection point for that ratio chart.

 

Adam Turnquist (13:54):

 

Meaning we could see the equal weight start outperforming the S&P 500, more of a mean reversion potentially. And you can see, you know, I think it's interesting where that ratio chart got back in the dot com era. That was a big tech heavy, top heavy rally at that point even coming out of the Great Financial Crisis. But all of you know, this rate of change is really marked inflection points on that ratio chart. So, something we're watching carefully, of course, doesn't mean we're immediately going to move higher, but we're kind of at that threshold where we could see a potential change moving into more equal weight out performance ahead.

 

Jeff Buchbinder (14:33):

 

Excellent. That certainly should be a good environment for active managers, right? You've got a better chance of a stock working that you purchase, right? If you have a market environment that's very narrow, where only a small group of stocks are working, your odds of picking a winner are down, right? And so, that's been a very tough environment for active managers the first half of the year. It's starting to get better. So, you know, folks with mutual funds, active management should fare better here in the second half relative to the index, than they did in the first half. So, let's transition to earnings, Adam, and I mean, as I said up front, it's early. The numbers actually have been a little bit disappointing. You know, we haven't really generated any upside yet, although I'd actually say it's maybe messy. I'm not talking about Lionel Messi <laugh>, although he's in the news right now. <Laugh>, I think he's, when is he playing in Miami? Tonight? Tomorrow?

 

Adam Turnquist (15:35):

 

I think it's tonight. Yeah. And that tonight, I mean, I know this, and I'm not a soccer guy, so, or football or whatever you want to call it, depending on where you're from, but I did see that I think the game is tonight in Miami.

 

Jeff Buchbinder (15:46):

 

So, where else can you get soccer references and a Market Signals podcast, right? I mean, <laugh>, that's I didn't see that one coming. But anyway, the reason I say it's a little bit messy is because a lot of the data aggregators try to figure out what's recurring earnings, right? What's operating earnings and what's sort of accounting earnings, right? And everybody kind of adjusts earnings differently for these one-time charges that you really don't want in there, right? Because they're not going to recur. So, you know, some sources are saying, we're still on track to do three, four points of upside. Some are saying maybe we're going to be in line. So, I don't really have a call either way on, which is right. But let's just say you know, we haven't really made any headway.

 

Jeff Buchbinder (16:45):

 

But the good news is, well, there's a few things that are good right here. The earnings for the S&P 500 are going to trough this quarter, you know, even if we are down six or seven, like consensus suggested we would be and when the, you know, market likes to buy troughs, so if we're troughing on earnings right now, if the earnings recession is ending now, then you know, you're probably going to bring some buyers in off the sidelines that want to take advantage of the earnings recovery over the rest of the year. So that's good news. Also good news and then I'll turn it over to you Adam, the banks, right? We got solid results from the banks and a lot of people were worried about those and not just the big ones, even generally the regionals have been pretty good.

 

Jeff Buchbinder (17:29):

 

And we haven't seen this deposit flight continue that a lot of folks were worried about. Now a lot of the banks have increased reserves against future loan losses, so there's still a little bit of economic caution, not like we heard about you know, a year ago or two when a lot of folks were certainly worried about you know, more worried about recession in the CEO seats for some of these big banks, but still some economic caution. And you know, the fact that financials have rallied this week as we showed you on the earlier slide, you know, up 3% plus in four sessions, I think that tells you that the market's pretty relieved and was impressed generally with these results. And so, if you get reserve increases out of the way and stocks go higher, it puts you in a really nice place. So, you know, we're still neutral on financials at LPL Research. It's not, you know, screaming by based on valuations or anything like that. It's still a tough rate environment, but I think that's a really encouraging development here. You know, over just the last week or so, mostly financials reports that we've gotten thus far. Any thoughts there, Adam?

 

Adam Turnquist (18:45):

 

Yeah, the technical picture for the financials is certainly getting a little more constructive, especially within the regional banks. We've seen some of those regional banks indexes start to break out from what look like shorter term bottom formations. Looks like there's some more upside there potentially in terms of the recovery period. But yeah, I think, you know, when you look at price action, that would certainly suggest the worst is behind us hearing some of the commentary in this quarter's earnings and looking at the deposit, you know, deposit flights, you basically, you know, are no longer a major concern. We're seeing actual deposit growth, even though it's a little bit more expensive to get those deposits. I think when you add that all up, I think you make the case that the worst is likely behind us. At least that's what we're seeing technically.

 

Jeff Buchbinder (19:35):

 

Yeah, the regional banks are still very attractively valued here. And we haven't seen the credit markets telling us, here's market signals, right? We haven't been getting a market signal from the credit markets suggesting that the banks are in trouble. So, I think you have to say that's been a big win so far during earnings season. I'll also say, and maybe, I'll again offer the disclaimer that we're, you know, I don't even think we're a quarter of the way through. Next week's a huge week for earnings season. It's early, but just the fact that Q3 consensus is still positive is also a win, right? That plus 0.8%, it's not much. But it's still positive. If we can hold flat there, good chance we're flat or better when those numbers are actually reported. That's your historical pattern, right? Where you start the quarter is kind of where you end up getting those numbers.

 

Jeff Buchbinder (20:28):

 

They come, you know, estimates go down and then the beat brings you back where you started, right? So we'll be watching that really closely for guidance. I mean, guidance was okay, kind of average coming into the Q2 earnings season. So, you know, that would suggest, you know, maybe these estimates are kind of right where they, right where they should be. Of course, we're hoping for better and tech's going to be a big factor in determining where these numbers shake out cause it's such a big chunk of the overall earnings numbers. And as I mentioned, we've got a lot of big names reporting next week. So I think 163 S&P 500 companies report next week. Something in there if I'm remembering right, you know, this week was a pretty quiet week.

 

Jeff Buchbinder (21:11):

 

I think we only had 78 companies total through yesterday that have reported. I believe 60 of those were this week. So, it's just, we just haven't had a huge number and it's been concentrated in financials. So tech is really the key this earnings season. Tech really, really saved us last quarter. Those NVIDIA numbers at the end of earnings season were just incredible, frankly. And it basically turned tech's earnings season from sort of average to tremendous <laugh>, just that one company's earnings report. So yeah, we'll see what we get from NVIDIA in what a month I think they report August 28. So that is a long way off, but these big texts next week and then Apple the following week are certainly going to go a long way to see what kind of numbers we get.

 

Jeff Buchbinder (22:02):

 

So, it's too early to say we'll probably be up in Q3, but there's certainly a chance and Q4 up 8%. I mean, if that, if we can get that kind of a number you know, when all the results are in market's going to like it. And that can keep this market afloat. Because as we wrote in our Weekly Market Commentary for this week on earnings, you can get that on lpl.com. The bar is raised when you're at higher valuations, when you're at 20 times earnings you know, versus maybe the long-term average around 15, 16, you really need earnings to carry you forward. You can't do it with just PE multiple expansion forever. So, the earnings are really important this quarter, I guess is the bottom line there. So anything else to add on earnings, Adam, before we preview the week?

 

Adam Turnquist (22:49):

 

No, I definitely think it's going to be an interesting one, especially with some of these stocks that are extremely overbought. Going to your point of things, you know, the bar being relatively high, you know, if you're up a hundred percent coming into the print, I think that's going to be a pretty high bar to clear for the market to be happy. Even an inline print or a little bit above expectations. I don't know if that's enough to keep some of that momentum going in some of those names. So, we'll see how it plays out next week. Definitely going to be an interesting one to watch.

 

Jeff Buchbinder (23:19):

 

Yeah, certainly. Absolutely. If we get a soft landing, which, you know, we think is probably less likely over the next six to nine months that'll help support earnings and maybe keep this market going higher. But at the same time, we're due for some volatility, so, you know, hopefully we don't get volatility next week. But boy, there are a lot of big reports and events on the calendar that could potentially spark some volatility. So, let's go through some of these. I mean, the obvious big event of the week is the Fed, Adam, and you're certainly one of our Fed watchers. I think you know, the consensus view is that this will be the last hike, but maybe they won't spell it out that way. <Laugh>, right? They use sort of vague language. They'll say, you know, maybe we're data dependent, maybe we'll hike again, maybe we won't, you know, and so the market could be left disappointed that it doesn't get a clear signal that we're done, but we're probably done. What do you say to that?

 

Adam Turnquist (24:24):

 

Yeah, I like to look at the, the two-year treasury yield for the signal technically, and that's the message right now. It's that we'll likely see the last fed rate hike next week, you know, the two-year briefly retested its March highs and subsequently pulled back forming a, you know, maybe a potential double top there. You know, if we would've had a breakout on the two-year, that would be a totally different message. But the fact that it's contained, we're not making new highs there, I think does suggest that, you know, we'll likely see the last of the Fed rate hikes. Of course, you know, that's subject to change because we got a lot of data between the September meeting, the November meeting and we've been talking about the final rate hike or this pause for a while, and the Fed has been increasingly hawkish coming into this meeting as well. So it'll be an interesting dynamic between what the market is saying and what the Fed is saying. So we'll get some more, hopefully some more clarity on that next week

 

Jeff Buchbinder (25:19):

 

Coming into the year we thought we'd be done in March. So, and that was consensus I think too. So yeah, we've certainly missed that by quite a bit. But the, you know, the good news is we can start looking ahead soon, even if it's September we can start looking ahead soon to a period of lower inflation, lower interest rates, lower market based interest rates, right? Which should be good for bonds and stocks in the second half of the year. Even if we did pull some of those gains forward, right? I mean, this, you know, we're up close to 20% year to date on the S&P, right? That's a lot of optimism being priced in. Obviously, the end of the rate hiking cycle has been telegraphed. Even if the Fed hasn't really spelled it out for us, they continue to be vague and say they're data dependent.

 

Jeff Buchbinder (26:10):

 

So, that'll be interesting to watch. Of course, the Fed, I mean the GDP is going to be interesting too because we could have another up 2% kind of a number. We'll see, you know, that doesn't change the fact that you might see a little bit of a contraction in Q4 or Q1. Actually, some people think we could even contract in Q3 because the more you inflate, the greater the chances that you deflate <laugh>, right? What goes up must come down. So, you know, I don't want to sound too pessimistic about GDP, but certainly this economy does not have the foundation to string together a series of 2% GDP numbers for the next several quarters. It just doesn't look like it's possible. So, we're going to get a slowdown, we've got a slowdown in the job market.

 

Jeff Buchbinder (27:04):

 

Consumer spending’s, certainly, you know, slowing down, inflation's helping, but certainly consumer spending is slowing down and that savings pile is, is dwindling you know, coming out of the pandemic. So, you know, we'll see, but just don't celebrate that number too much if it is close to 2% because you know, that's backward looking and, you know, we're probably not going to keep that up. Hopefully we can continue to grow through the second half. That will be a win as most people expect you know, kind of a flatter down quarter at some point. So I mean, other than that, you know, we'll watch claims closely and then the Fed's, PCE deflator, that's the Fed's preferred inflation metric. That's, you know, one of the reasons why this market's been up recently is because we got that series of good inflation data over the last month. I mean if you're string together 0.2% month after month, you know, eventually you're in the twos. So that's certainly what we're hoping for. Any thoughts on PCE, or just inflation in general, Adam?

 

Adam Turnquist (28:09):

 

Yeah, I think for looking at next week, you really have to hold your breath until that PCE print on Friday. So even if we get a more of a dovish type of Fed meeting, it's really going to come down to that PCE data. It's obviously inflation has been the big factor, that's all the Fed talks about. So, I think that will kind of cap off the week depending on but really dictate the week in terms of overall price action. So, and then if you look just abroad, you have the ECB with their monetary policy decision next week and the Bank of Japan. So could be an interesting week to say the least.

 

Jeff Buchbinder (28:47):

 

Yeah, Japan's particularly interesting because the market's been speculating that they would adjust their yield curve control, right? In other words, like buy less bonds, less quantitative easing, right? But their headlines overnight you know, suggesting maybe they just hold and do something later. So, I think, you know, the yen's getting hit pretty hard today. So, that'll be a really interesting one you know, with their new central bank chief and some of the enthusiasm that investors have shown for Japan here over the last several months is that that market's broken out to what, 33-year highs?

 

Adam Turnquist (29:27):

 

Yeah. Yeah, it's been a big rally.

 

Jeff Buchbinder (29:29):

 

Like that on the Nikkei I believe so, that continues to be a market that, that we in LPL Research like, so we'll be watching the Bank of Japan, the ECB, but I think the Bank of Japan meeting is more interesting. So thanks for bringing that up, Adam. We have a domestic calendar here. So here are your highlights plus the earnings, again, a ton of companies reporting next week. So buckle up. I'm glad I'm going on a little bit of a vacation this weekend so I can energize for the big week. So, anything you want to mention in closing that we missed, Adam?

 

Adam Turnquist (30:06):

 

No, I think we got it.

 

Jeff Buchbinder (30:08):

 

Overall. All right, let's, let's wrap it up. You know, it's Friday, so, you know, we want people to get to their weekends quicker, so we'll <laugh>, even though we may not get this posted till Monday, we'll see. So, thanks everybody for joining us for another LPL Market Signals. Thanks Adam, for jumping in. We switched up the order, we switched up the timing of the recording to accommodate schedules. So really appreciate that everybody. Thank you for listening. Thanks as always for joining LPL Market Signals and we'll talk to you next week.