What The Charts Are Saying

The Market Is Short Term Oversold

 When less than 10% of stocks in the Russell 3000 are above their respective 20-day moving average, the market is sufficiently oversold in the short term. 

Is The Market Overpriced?

Yes. Despite the correction, the S&P 500 valuation of 20x is above its long-term average of 17x and the equity risk premium of 3% is below the long-term average.

The Rest of the Market: A Different Story

If we ditch the top 10 superstars of the S&P 500, the rest of the gang (the S&P 490) is looking more attractive. While they’re still a tad expensive, the valuation is much more reasonable than their A-list counterparts.

Growth on sale?

Here’s the twist: analysts expect earnings growth for the S&P 493 to accelerate in the 2H and into 2025 and grow faster than the Mag 7.

The Future Looks Bright

Analysts predict earnings to rise in 2024 and 2025 and current positive revisions support this forecast.

Lessons from History

 Based on past inflections (2012-13, 2016-17, 2020-21), when earnings growth picks up again, it is wise to focus on stocks instead of worrying about the overall market. 

What Market Regime Are We In?

 When growth is stable and inflation is rising, the market performs in line with its long-term average. However, it is worth noting that cyclical sectors such as energy and materials perform much better than the rest of the pack. If you missed it, my favorite energy business is Tidewater (LINK) and I remain bullish on Gold (LINK).

Is Inflation Coming Back for Round Two?

The jury is still out on this one. If wage growth continues to moderate, then inflation may not be as bad as it did in 2022.

The good news? Charts suggest we’re not nearing the end of the economic cycle. This means focusing on individual stocks with promise is a wise move. I plan on writing about several businesses that I find promising. Be on the lookout!

Happy bargain hunting!