Where is the top?

Brit Ryle

Posted June 12, 2023

I’ve been doing my fair share of griping lately. Because it drives me nuts when all the strategist-types from the big investment banks, along with the mainstream financial gurus, continue to pound away at the bear market case for stocks, despite growing evidence that there is a new bull market in the works.

After all, the S&P 500 is now up better than 20% from last October’s lows, and that meets the universally accepted definition of a bull market. 

Of course, investors that wait for a bull market to be confirmed by a 20% rally, well, they’ve missed a 20% rally. 

So it is for market strategists for both Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC). Last week, they both declared “bull market” and raised their end or year targets for the S&P 500. 

By my count, the mass defection to the Bull Side leaves just one doom-and-gloomer among Wall Street’s major investment banks: Morgan Stanley. 

Morgan Stanley’s Chief U.S. Equity Strategist Michael Wilson says that the bear market isn’t over, earnings for the S&P are headed lower through the end of this year, and that there will be a sell-off for stocks. 

As far as earnings go, Mr. Wilson is pretty much a lone voice in the wilderness. First quarter earnings were down 2.2% from last year. The consensus among analysts is that the current quarter is the last one that will see a year-over-year decline. Analysts expect earnings to grow a paltry 0.8% for the third quarter and then jump higher by 8%.

If you’re wondering why earnings will end the year on such a strong note, I can answer it in 4 words: Amazon, Meta, Google, Nvidia. 

Three of these companies – Amazon (NASDAQ: AMZN), Meta (NASDAQ: META) and Nvidia (NASDAQ: NVDA) are each expected to more than double their fourth quarter earnings over last year. I don’t know what Google’s problem is…(kidding).

We’ve seen the earnings power from Nvidia, no need to re-hash the earnings explosion that company is enjoying right now. 

Meta just broke a 3-quarter stretch of missing earnings expectations. With revenue only growing around 8% this year, the upside for Meta’s earnings growth this year will be because of the massive layoffs the company made over the last year. 

Amazon will do a bit better, with 9% revenue growth expected this year. 

Both Nvidia and Meta have more than doubled in price this year. Amazon is up around 47% so far. Given the relative performance of each of these stocks, Amazon is the big tech stock to own. As the biggest cloud player by virtue of Amazon Web Services, Amazon has the most upside from partnering with AI companies to provide the massive amounts of processing power these applications require. 

What’s Ahead for Inflation

So, I’ll go on record and say that Mr. Wilson will be proved wrong about S&P 500 earnings this year. And I think he’s wrong about the bear market, too…

And it’s because the trend for inflation and the Fed’s rate hikes has clearly changed. 

We’ve got the Consumer Price Index (CPI) coming tomorrow, and the Producer Price Index (PPI) coming on Wednesday. Each of these reports is expected to show further easing of high prices. 

As I’ve said for a while now, the Fed is not going to hike rates on Friday. But I can easily imagine Fed chair Powell talking tough about future actions in his statement after the no-hike is announced…

Something along the lines of “though it has moderated, inflation remains well above target levels and the committee stands ready to use all of our tools to ensure price stability…”

Knowing how the Fed will act is one thing. But how the market will react is quite another. Interestingly, Mr. Wilson believes that the Fed will mark the top of this rally. That this Wednesday’s policy statement will kick off a correction for stock prices.

Let’s just see about that…

About That Correction

The S&P 500 has added 5% since May 24. It is now challenging its 52-week high, set last August, at 4,305. In fact, with a strong 40-point move today, the index is setting a new above 52-week high at 4,339. 

Powerful move, and with Goldman Sachs and Bank of America just now turning on the bull market charm, it would be easy to think the S&P 500 is headed higher still…

But let’s have a look at the chart. Here’s a 1-year version so we can see that former high…


Source: Yahoo Finance

As you know, my charts always include the 50-day moving average (purple line) and the 200-day moving average (black line) so we are ever mindful of medium- and long-term trends. 

The red line at the top marks the former 52-week high. You can see how, in the far right corner, this line has acted as resistance over the last week, with a break above that resistance line happening today. 

At the bottom of this chart, the angled red line is the uptrend line – note that the uptrend line and the 200-day MA have converged. 

Now, an index officially enters “correction” territory when it has declined 10%. A correction doesn’t become a bear market until it has declined 20%. Right now, a 10% correction would take the S&P 500 down to 3,903, a bit below the 200-day moving average. 

Frankly, I consider a drop below both the rising trendline and the 200-day moving average as a pretty low probability move. I certainly wouldn’t go on TV and predict such a move. And I wonder if Mr. Wilson is regretting his decision to do so. 

But a test of the 50-day moving average? Now that seems quite reasonable to me. The question is when, not if, it will happen. And the summer months are always a good time for a little selling. So if you’ve been making some loot in this market, it’s time to start taking a little off the table to redeploy after prices get cheaper. And if you’ve been on the sidelines, have your wish list ready.

That’s it for me today, take care and I’ll talk to you Wednesday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today 


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