Last week the markets rallied as I expected but many investors were pointing out that this rally is fake, bear market bounce, and that only a few big tech companies participate in this rally and thus the market is in fact doomed. And they may be somewhat correct but only in one fact – the market is propped by a few big techs only and the rest lags. The best way to view this is to look at the market’s breath (the ratio between advancing and declining stocks). As the chart below shows, the market was rallying last week moving higher but market breath is actually going down indicating that most of the stock are declining and only a few are going up.

And that same experience could be happening to your portfolio, too. The market is up 30% this year but your portfolio lags. Mine does. My market indicator shows the index to be up 15.88% while my portfolio is up 8.66% only. Why is that? I do everything I can, and I hope that “everything I can” is the right thing to do. I invest in high quality stocks, reinvest the dividends and on top of that, I sell covered calls and options to generate further income. Yet my portfolio lags. Why?

The answer is simple, my stocks do not participate in the rally, and I do not own all the darlings that push this market up. Yes, I do own some shares of Microsoft, Apple, and Google, but not enough to prop my portfolio in the same way they prop the index. We can see this when we look at equal weighted SPX index and compare it with SPX:

And yes, we must admit that the equal weighted index is going nowhere while SPX (the bottom picture) is reaching a new high in the same period. And that can be concerning. A lot!
But how concerning is it? Well, the problem is that many investors that claim to be long term investors are sitting in cash and waiting for a better tomorrow instead of being invested. The amount of bearishness is still extremely high, higher than it was in 2008-2009. But it is changing although that change is subtle and not as obvious as one would think. But all we need is perspective. If we step out and look at the breadth from a longer perspective, we start seeing some improvement:

As we can see from the chart above, the market breadth is actually making new all time high! Of course, it still may all change. Bad news from the FED, bad CPI report next week, or raging inflation can change it all right away. But it hasn’t changed yet. In fact, it is telling me that more and more of the laggards are coming to participate in the market and as more of them do so, more people will realize that sitting on the sidelines was stupid and these same people will once again become the so called “long-term investors” (until the next bear market).
This dominance of a handful stocks leading this new bull market may end soon as we start seeing the rally slowly spreading into the industrial, aerospace, financial, energy, and material sectors. This can help this rally even more as broader market starts participating and more investors will feel the FOMO and make this bull more sustainable.

Just a few minutes ago before I started putting together this newsletter, we received news that our inept politicians finally struct a deal and they would vote about rising the debt ceiling on Wednesday next week. In my last newsletter rant about the debt ceiling, I expressed my conviction that in the end, the politicians will make a deal, unless they want to cut the tree branch, on which they are sitting, off under their own asses and screw themselves and us with them. I couldn’t believe that they would be that stupid, though I have no illusions about them anymore.

Based on this news, I would expect that the markets will rally next week. But the markets would rally despite the debt ceiling circus in Capitol Hill. The debt ceiling could only temporarily choke the markets but not for long. Why? Because this is all noise. None of it matters long term. This doesn’t drive the markets up or down. It only pushes them around the fair value of the markets and creates opportunities when idiots out there start panicking about a wrong issue and rush to exits. So, learn about the market and stop being an idiot. There are enough of them already.

So, what drives the markets? Earnings. But most importantly, earnings estimates! Earnings and estimates go up, the markets follow. They go down and the markets follow too.
Just recently, I saw this chart on Twitter:

If you think rationally, you will dismiss this nonsensical “analysis” as total trash. If you think the markets behave based on some arbitrarily created chart describing a bubble and a real chart scaled to the tune of the cartoon to make it look like we are about to crash, because the cartoon said so, you have no place in the markets, unless you want to lose money. The idiocy in the chart above is unspeakable.

Rather than guessing and wishful thinking, gather information about the markets. And it has been proven many times that earnings drive the markets. And you will also see how retail investors deceive themselves by being uninformed.

Many times, during 2020 and 2021 retail investors were posting on social media that the market is way overbought and in a parabolic rally and doomed to crash. They were posting charts like the one above proving their point. The bear market eventually happened but not when they wanted it. And all you needed to do is to look at earnings.

If you were betting on the market crash in 2020 and 2021 because the market (blue line) was in parabola you got badly burned. A simple look at earnings (orange line) could tell you that the earnings were skyrocketing too. It is a typical behavior after any crash. Look at 2009. A sharp rebound in earnings and strong rally. And the markets followed (despite media warnings us almost every day about an imminent second recession).

And the same happened in 2020. The earnings crashed but rebounded and rallied. This time, the markets went ahead of itself and rallied more than the earnings, but the earnings rally was parabolical too. There was no reason expecting the markets to crash. When earnings finally stopped going up, the markets followed.

Today, we keep hearing from bears that the markets are bound for a second leg down. Well, unless the earnings continue to go down, this will not happen. And so far, earnings came back better than expected (80% of the companies beat their expectations) and estimates are no longer revised to the downside. And at the end of the year of 2023 earnings are being revised up. If the companies continue to beat these estimates, the markets will follow higher.

And, if we look at the shorter time frame, we can see that the markets are more pessimistic about the earnings than the earnings themselves. The markets are lagging the earnings:

What is this telling you? Well, a simple thing! The markets have plenty of room to the upside. And if earnings start sloping up, expect a strong rally. And of course, the bears will get crushed on the way up, until they admit that they were on the wrong side and start the FOMO.
 
 

The debt ceiling was put in place by Congress during World War I and its purpose was to shift debt management from Congress to the government. Before, it was Congress who approved all expenditures. But during the War, it became difficult for the government to go to Congress and get approval for increasing war effort costs. So, Congress shifted this manner to the government, but it established a limit after which the government must have sought Congressional approval. If approved, Congress raised the ceiling and within the new limit, the government could do its day-to-day operations. But that’s when the circus started.

Since then, Congressional parties used the debt ceiling for their petty agendas, holding the US economy hostage. When Republicans were in power, none of them had any issues raising the debt ceiling and Democrats opposed it. When Democrats were in power, the tables turned around. They had no issues raising the debt ceiling and Republicans opposed it. When you look at it from this perspective, you will see how petty and stupid these politicians are.

And since then, this debt ceiling limit, which was also designed to curtail the spending, failed to do so. The national debt rose nearly 400% in the last 20 years.

But if you see politicians fighting over the spending, remember, next time when voting, that these politicians are fighting over expenditures such as Social Security, Medicare or Medicaid, Veterans’ programs, higher education, department of health expenditures, education, justice, and veteran affairs (among others). These are the biggest mandatory and discretionary expenditures.

Remember these politicians and in this case Republicans that they are the ones who will be responsible for your social security pay cut, or your Medicare failure. When at the voting booths, vote them out. They do not care about you. They have their retirements and Medicare secured but the government and they and their families will be taken care of no matter what. It is you who will be the useful fool cutting out your own welfare when you reach retirement.
Of course, you may be outraged over the raising expenditure and debt. You may be angry over Biden’s reckless spending, but you should not be supporting anything that cuts your benefits for which you worked hard your entire life and paid (involuntarily) into the system.

Despite all this circus, the markets held well. There were rattles about the debt ceiling, but it seems that the market expects politicians to strike a deal in the end. At least for now. That’s why we are mostly flat with some wobbles around. And tech stocks even exploded upwards last week (mostly on better-than-expected earnings). The FANG index (FGNU) skyrocketed a whopping 16% last week!

It seems that investors are finally waking up and realizing that all the stocks like META, TSLA, NVDA, AMD, NFLX, AAPL, AMZN, SNOW, MSFT, or GOOGL are still the best growth stocks in the market and selling them out is foolish. The investors were selling out of these stocks, and today, they are hastily buying back at higher prices. You may argue that these stocks are overpriced, and they are, but they will perform well better in today’s FED environment than last year’s FED policy. These stocks will outperform the market this year.

The latest market worries are about the debt ceiling and regional banks turmoil. It is my opinion that both will be resolved. The banks had a way better week last week and the debt ceiling is still on the table. Both parties will have to give up some of their agenda and get the things done.