Periodically, I write a lengthy piece detailing my "big picture" views of the U.S. stock market. Most of my daily work day is concentrated on individual stocks, commodities or ETFs, but I also try to keep a broad top-down view in mind when I write all my stories.
Lately I have gotten a number of emails from Real Money subscribers asking whether I have changed my 2023 views.
"Let's go to the videotape" was a favorite line of the colorful sportscaster Warner Wolf, so let's do a quick review.
In the middle of 2021 I wrote this bottom-line strategy:
"The stock market has given us some incredible returns in the past year or two but there are some warning signs developing and traders need to start leaning in the other direction.
Consider adding to commodity plays as they could be the outperformers of the third quarter. Consider becoming a scale-up profit taker. Continue to raise your stop protection to lock in more gains.
Pay closer attention to where in the range prices are closing. Highs are typically made when prices close near the high of the day.
Is the On-Balance-Volume line weakening as volume increases on days when the market or your favorite stock declines? Pay closer attention to the news and watch for stocks and the market to decline on bullish news -- this tells us that the news has been discounted.
Do not count on diversification to save the day -- there are times when everything goes down." (bolding added)
And on December 9, 2021, I provided my 2022 forecast, noting that:
"I look for the S&P 500 to decline to the 3000 area and make a low in the late second quarter or early third quarter of 2022. With the S&P 500 trading around 4700, this represents a loss of around 36%. We can label it a bear market if you want but a flexible strategy is more important than a label."
On January 5, 2023, I penned my 2023 forecast where I wrote:
"Rallies like the one on November 10 on the heels of the CPI report give people hope that their accounts will get back to even. If the major averages turn down yet again the result could then be that on the margin we could see the over-65 crowd sell stocks in the first quarter of 2023. This could be the price low that we want to buy."
So far, I have not heard that my neighboring seniors are sellers, but they do bemoan the weakness in the markets and they are more price conscious in their expenditures.
Recent news events and market moves prompt me to refresh my views.
Valuation
The downleg into October 2022 was a valuation correction as interest rates rose sharply. Many fundamental analysts and strategists have commented on this in the media. What will be the next downleg?
Despite the recent declines in rates and last-minute nail-biting bank rescues, I suspect that the monetary framework will tighten further as bankers become more cautious. The barn door has closed. The bank rescues in the U.S. and overseas dominated news reports over the weekend and op-edits as well.
Even if the Fed and other central banks would cut rates, this tightening of financial conditions will likely continue and is likely to weaken final demand and that could lead to a recession that may begin later this year. This is the way I am interpreting the repercussions.
While the recession may be mild, according to several economists, the slump in earnings could be sharp and equity markets are likely to decline into a lower low later this year. The anticipated low could probably be in the low 3000 area for the S&P 500. Again, try not to be fixed on a level.
The next decline could be very volatile as it will discount declining profits. Analysts such as Mike Wilson and his team at Morgan Stanley ( MS) have been talking about this. Veteran analyst Ed Yardeni has also turned in this direction.
There is no published schedule on when analysts may cut their EPS estimates and price targets. This could happen in clusters and lead to a volatile environment and potentially a big rise in the VIX. A rally in the VIX into the 40-50 area may be a clue that helps to identify the low in the averages.
An investment service I follow ( www.pfr.com) pegged the valuation of the S&P 500 around 3775 in February of 2023. I would like to see the market get down to 10% to 20% below value or somewhere in the 3397 to 3020 area for the S&P 500. This is the difference between a trading low and an investment low, in my opinion. In comparison, back on March 31, 2021, the S&P 500 was 21.56% overvalued.
Advance-Decline Lines
In this chart of the S&P 500, below, I see that the breadth of the advance from October has turned weak.
And the weekly chart of the S&P 500 a/d line is also weak.
In this chart, below, I show the NYSE Composite Index, which is a broader average than the S&P 500 and here, too, the breadth of the advance has turned weak.
Sentiment
After the Nasdaq low in October I saw a number of headlines on market newsletters I follow that went like this: Can't Stop Won't Stop (referring to the averages) 
Don't Think, Just QQQ
Offense Takes the Field
I can imagine there were fist bumps on trading desks with some strategists leapfrogging year-end price targets. I have seen a parade of market commentators believing they are right and the Fed is wrong. Are they trying to gaslight the markets?
I, on the other hand, wonder why so many people believe that "V" bottoms are the norm.
For better or worse I am an old-school chart reader so I ask questions such as, "Where is the breakout or lift off trading volume?" In my coverage of individual stocks I see rallies on weak volume and chart breakouts on less than impressive turnover.
Fifty years of stock market muscle memory tells me not to trust these moves.
When I came out of university, I started to learn about the commodity markets in the 1970s, then the interest-rate markets in the 1980s and the stock market in the past 25 years. Over all those markets and years I have never before encountered so much public interest and participation in the markets. This is both good and bad, in my opinion.
The other day I listened to a video presentation where listeners were able to have their own live chat. I found it amazing that so many people railed against the numbers, the Fed, people -- they were right and the markets were wrong... a sense of entitlement, they were smarter... conspiracy ideas... you name it.
How can these people make money in the markets? Are they even on a learning curve? Small moves on the charts are quickly turning into major events with algos all jumping in along with excessive media attention.
Sentiment needs to get really "dark" in the months ahead. Media coverage to cartoons to anecdotal stories to maybe some Chapter XI events. On the margin we need some people to "throw in the towel."
China Is Another Issue: The FXI
In this chart of the ( FXI) or the iShares China Large-Cap ETF, below, I see a weakening picture. Prices rallied from late October on the China reopening story. The trading volume declined as the rally continued. Prices peaked in late January and have declined back below the popular moving averages.
The On-Balance-Volume (OBV) line has turned lower and the Moving Average Convergence Divergence MACD oscillator is bearish now. This weakness in the FXI suggests to me that the China reopening story is fading quickly as a bullish influence.
Bottom-Line Strategy
Technical analysis is a windsock and not a crystal ball.
This phrase comes from my longtime friend John Bollinger, CMT and refers to the shortcomings of technical analysis.
Hopefully we can get the timing and direction of the markets right but do not expect that everything can be forecasted successfully. No investment approach is 100% perfect, including technical analysis.
The phrase "It ain't over till the fat lady sings" is a colloquialism often used as a proverb. It means that one should not presume to know the outcome of an event which is still in progress. We really don't know what tomorrow will bring so let's stay flexible and nimble.
