AFMC - Markets Unlocked 2/27/23: Monitoring Weakness

Summary

• Stocks were once again weak last week.
• One of the most common misconceptions is that there are true, leading indicators.
• Any indicator that has a leading component requires significant interpretation - sometimes they work, and sometimes they don’t.

Stocks were once again weak last week. While it's easy to extrapolate whatever the market is doing into infinity, it's important to put the move in context. This, in fact, is one of the common mistakes to assume that strength will continue, or that weakness will lead to stock cratering. The current weakness has moved us to a point of near-term technical neutrality - not overtly bearish, but enough weakness to erode the bullish edge. We continue to be mindful of intermediate-term bullish potential, and the longer-term concerns that probably lurk at the 1 year or so horizon.

Coincident indicators

One of the most common misconceptions is that there are true, leading indicators. Any indicator that has a leading component (and indicator, in this context, refers to both economic indicators and technical indicators) requires significant interpretation - sometimes they work, and sometimes they don't. Most of the relevant indicators are coincident - meaning they turn with the thing they are forecasting, rather than before.

One might ask how this can be useful. One critical way is that a move in an indicator can, in some cases, be measured against the move in the market. We have long followed the spread between Consumer Discretionary and Consumer Staples stocks as a measure of sentiment or conviction behind a move. It tends to be strong in confirmation of rallies in the market, and weak on declines. (This most likely reflects broad risk-on/risk-off approaches to investments.)

Though this spread has been weak, putting recent data in context shows that this is a weakness, perhaps natural mean reversion, following a period of exceptional strength. It is not a continued and persistent weakness in the spread. We look at this as another slightly supportive factor in the face of nearly a month of selling pressure in the market.

The week ahead (potentially market-moving datapoints)

• Monday: Durable Goods, Pending Home Sales
• Tuesday: Case-Shiller Home Price Index
• Wednesday: ISM Manufacturing
• Thursday: Jobless numbers, Productivity & Costs
• Friday: ISM Services

Note: Every day this week features at least one speech by a Fed President or Governor. These have sometimes been market-moving events, especially for intraday traders.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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