During the past week we have continued to see positive expansion in market breadth.
More and more sectors are participating in the rally that began a month ago and has been
supported almost exclusively by a few huge tech companies. In my view, this is a very
positive development and strengthens my belief that this rally could be the beginning of a
new bull market, rather than another in a series of very painful whipsaws. I would like to
see the financial sector improve, but all in all, things look more solid.
The market cap weighted indices, especially the Nasdaq, are technically overbought and
more than due for a pullback or breather, so I think we should be prepared for some
increase in volatility over the next few days or weeks. Markets don’t go straight up, and a
pullback at the current levels won’t change my optimism.
For those interested in the “technical” definitions, we exited the bear market this week
after achieving a 20% gain from the October market lows. This marked the suggested
end of the longest continuous bear market since 1948 (Source: WSJ.com).
Inflation continues to moderate, albeit slowly, and the Federal Reserve finally hit the
pause button after 10 consecutive rate hikes (Source: CNN Business). This in and of itself
is very good news for everyone, but especially for banks and the bond market, which has
been obliterated over the past year. The yield curve remains severely inverted and that
needs to change to take recession probabilities off the table. To me, the inverted vield
curve is worrisome and a major risk factor going forward. For now, I will put that negative
in my desk drawer and focus on the positives.
At Cabana, we have reallocated all our portfolios in response to CARA’s signal this week
and are now in our Transitional Bearish (improving) scene.