Market Update February 28th, 2023: Sideways Normal Market Type By, RJ Hixson

rj headhsot flowersIf you would like to read this article in a downloadable pdf format, click here.

Part I: The World Market Model

As a mild winter in much of the northern hemisphere gives way to an early spring, do we see green shoots emerging from the markets? Let’s see if there are any early blooms in the World Market Model.

1142 MU Chart1

 

The picture at the end of February is pretty similar to January’s picture—a marked improvement from the year end situation in 2022.

Here are some highlights:

  • European country markets were unanimously green at the end of January but strengthened more in February. Now, more than half of the symbols are very strong or dark green. Indeed, many of the European country market symbols are on the top 15 list for the database. Europe is the leading region for the world again in February.
  • US market segments are all positive again but contain a mix of weak and moderate Market SQN scores.
  • Sectors have improved slightly overall from last month, with the only very weak symbol being volatility (VXX). We still see a mix of colors with no dark green sectors.
  • Currencies are a mix, with the USD still earning a negative score. But, it’s much less negative than last month. We will see why in the USD Index chart later on in the article.
  • Asia remains a mix of mostly green and yellow countries. India (INDA) turned in a strong bear score.
  • The Americas markets outside the US are a mix of brown to deep green, indicating a range of performance. Mexico is one of the top performers in the database this month.

Commodities are a mix again this month. Steel is the strongest commodity and natural gas is the weakest. Although gas is no longer the weakest symbol in the whole database like it was in January. Notably, however, the blended commodities ETF (DBC) turned negative in February.

Real estate and bond symbols are weakly positive or weakly negative. It was interesting to see some analysts in February recommending adding bonds to portfolios now. That’s a belief they are basing on some historical analogs. Is it worth exploring for your holdings?

1142 MU Chart2 1

Thirteen of the Top 15 symbols in the database are related to Europe, and those Market SQN scores are very strong. The entire Top 15 list this month is dark green—a first in many, many months. Go Europe!

Volatility-related issues dominate the top of the Bottom 15 which means they were the worst-performing over the last 100 days (early October). When you see the S&P volatility chart further below, you can understand why. There are a good number of individual commodity-related symbols on the list as well.

The bulge in the database stayed in the Sideways category in February, like January.

  • October: 50% of the symbols were Very Bearish
  • November: 49% were Sideways
  • December: 45% were Bearish
  • January: 55% were Sideways
  • February: 56% were Sideways again

At the end of February, 4% of the database was very Bullish, 22% was Bullish, 56% was Sideways, 14% was Bearish, and 3% was Very Bearish. Not much shifting happening at the aggregate level, though there’s likely shifting going on with the symbol mix in those categories.

Part II: The Big Picture

So, what are the other big picture factors affecting the stock market?

  • The rate of inflation continues to slow.
  • The Fed is expected to raise rates again by 25 basis points.
  • The USD reversed its four-month decline against other currencies.
  • The Chinese economy is re-opening, with many expecting a global economic boost.
  • A US recession is happening/will happen in 2023. Ask anyone. They’ll tell you.
  • P/E ratios remain exceedingly high on a historical basis.

Part III: The Current Stock Market Type is Sideways Normal

The Market SQN scores for the various periods we measure range from Bear for the longest timeframe (200 days) to Bull for the shortest timeframe (25 days):

200 days – Sideways (It was Bear for the last three months)

100 days – Sideways (Sideways last month too)

50 days – Bear (Sideways for the last three months)

25 days – Sideways (Bull last month)

You can depend on the Market SQN method to tell you the market type, but in this case – and often – you can also look at the chart. The S&P 500 looks pretty much Sideways back to the second quarter of 2022. Indeed, when Van was developing the Market SQN methodology, he’d look at the score from the spreadsheet and then he’d look at the chart. They had to match up in cases where the scores were clearly in the category. If you start 100 days back (early October), you can see a mild rise with some big bars, indicating volatility.

1142 MU Chart3 1

The Market SQN chart below shows the S&P to be high in the Sideways zone. With some more upward movement in the S&P, the Market SQN score will push into Bull. The score helps remove – or at least minimize – any emotional bias to want to see a more Bullish or Bearish direction for the bars. While the score popped into Bull twice in February, it finished the month in Sideways.

1142 MU Chart4 1

You can see the 20-day ATR% declining and flattening since last October in the chart below. This helps explain why the volatility-related ETFs have such low scores in the World Market Model above.

1142 MU Chart5 2

What do the primary indexes say? The Dow is down for the first two months of 2023 while everything else is up. The Nasdaq is up big for two months—15%. Remember though, it’s in a year-plus drawdown of more than 30%. Traders are just fine with this kind of action.

1142 MU Chart6 1

Part IV: Van’s Four-Star Inflation-Deflation Model

“Transitory” is not a term used much lately in relation to inflation. Does the Four Star model say inflation transitioned away?

1142 MU Chart7 1

Yes, it does. But it doesn’t indicate that it’s any kind of permanent transition. Van’s original model says that inflationary forces and deflationary forces are balanced at the end of February. Add in BTC and the model registers a moderate inflation result. This correlates with the official CPI numbers from the government but it does not match them. Van’s model measures more economy-level inputs using basic materials, commodities, gold, and the financial sector as the original inputs. Van added BTC recently as a proxy for stable value when it seemed that BTC may have replaced gold as a preferred store of value. The Four Star model was not designed for consumer use but for helping understand what factors are affecting the economy, and therefore, the markets.

Part V: Tracking the Dollar

The USD index was up nearly 5% for the month of February, after dropping 12% since late September. Reversal or start of a congestion zone? We’ll check next month.

1142 MU Chart8

Conclusion

What do we know?

  • The Fed is going to keep raising rates for the foreseeable future.
  • The US economy is going to have a recession in 2023.
  • The US economy at the moment, however, is still pretty strong.
  • P/E ratios are still high but the excess “froth” was blown off last year.
  • Europe and China’s reopening should help the US economy.

So…at the very least, things are OK. And…maybe good overall, yes? Green shoots!

But then you look at the S&P chart, and its Sideways direction says, “Maybe. Maybe not.” What does the market not know that people think they know?

Maybe the market doesn’t know:

  • How long the Fed is going to keep raising rates and how high they will take them.
  • If the expected “landing” will be soft, as desired, or harder than anticipated.
  • If the slight decline in consumer purchasing will accelerate along with the decline in consumer sentiment.
  • If earnings expectations are about to realign with more normal historic P/E ratios.
  • If Europe and China’s reopening will help the US economy in a significant way.

Perhaps the market has questions about other risks as well? Probably.

This pondering of the big picture helps enable possible and likely scenarios, which helps you prepare for trading the market today and in the near term. Scenario planning is not meant to, and does not give you, trades. That’s the job of your systems, which should work really well in a particular market type.

With a market type approach to trading, you have no worries about what the market is going to do. You just have to have systems ready to trade whatever does come. Trading like this is much less stressful than trying to predict the market direction or betting on a particular stock based on a prediction. That’s the recipe for a lot of worry…and losses.

What’s better? Figure out the different market types for your markets, develop a few trading systems that work well in those different market types, trade the appropriate systems and follow your rules. Simple? Well, not exactly. And it’s definitely not easy, especially if you haven’t done your internal self-work yet. That’s where VTI can help if you are ready to do the work to prepare yourself to be a successful trader.

Like the Boy Scouts say – “Be Prepared!”

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