Expecting the Expected

“If you do not speak English, I am at your disposal with 187 other languages along with their various dialects and sub-tongues...”

 -Robby the Robot from the Sci-Fi movie Forbidden Planet 1956

 I was asked last week about my reference to a Holodeck. Basically, the reference to the Star Trek phenomenon and the sudden emergence of Augmented Reality and its coincidental connection. In my opinion, there was nothing coincidental about it, nor most of the technological advances we take for granted that aren’t as original as suggested. Science Fiction has fed many a geek focused on changing the world.

 I bring this up because I read a couple of articles this week and curiously none referred to the obvious, non-coincidental, technically overbought condition of the capital markets. Technical indicators, such as RSI, are one of the few resources that can’t be interfered with by either Pindudes nor Algochums. When such a condition is upon us, there are two strategies on which, in my opinion, smart investors will focus on, don’t buy, but be prepared to.

 This overbought condition, arrived at by a 14 day calculation of closes, has followed market corrections for many decades. Assumptions of the occasional 5% pullback as an annual event has followed the trail of the S&P 500 resulting in such pullbacks occurring once a year, with more notable recognition during a bull market. Averages have been tracked suggesting 10% correction every two years, and so on. So, what will trigger the decline, Inflation, Economic Data, Earnings Data? 

• Inflation, specifically core inflation (ex-food & energy) is running at 5.3%, comfortably below the October 2022 high of 6.6%. Comfortable is not enough for Fed Chairman Powell, who testified in Washington this week and doubled down on the Fed’s goal to raise interest rates at least twice, before the end of the year, to reach the goal of bringing inflation down below 2%. While a number of pundits are predicting success, even going so far as to suggest reaching a level of deflation. 

• Economic Data, after a brief rise in May 2023, the U.S. ISM Manufacturing Purchasing Managers Index (PMI) above 50 (suggesting economic expansion) has remained below 50 (suggesting contraction) for the rest of the previous 8 months including June 2023. While the U.S. ISM Non-Manufacturing Purchasing Managers Index (PMI) has hovered just above 50, likely due to a stronger work force, that level has been mostly flat for the last three months. Worth noting is a less advertised piece of data referred to as the Leading Indicator, declined in May 2023. Historically, when this indicator has declined 3 months in a row, it suggests a coming economic slowdown. Curiously, as with much these days, the index has declined every month since June 2021. 

• Earnings will emerge as newsworthy when the 2^nd Quarter 2023 ends on June 30^th. Last quarter most analyst forecasts were off, due to expectations being lowered following negative guidance from CEO’s last quarter. This year the markets have moved aggressively higher and forecasts have been conveniently increased. In my opinion, this could be a set up for another disappointment, therefore worth paying attention to the CEO guidance, rather than the results.

 One last thing to note is the recovery of the broad indexes since the lows in October of last year have yet to outpace their previous 52week highs, and any correction as described above would be taking back already achieved gains. Sad, but not the worst case scenario, in my opinion. Just a condition that makes being patient easier. In the meantime, sector diversification is serving us well.