📈 Has the Bull Market Begun?

👉 On December 3, 2021 I shared with you all one of my favorite posts thus far — The Market is Melting; building a strategy & executing upon it.

👉 On January 18, 2022 I shared with you all my personal playbook for the coming years — We’re in a Bear Market (Playbook); introducing ways to hedge.

👉 On November 10, 2022 I introduced to you all a “bear market checklist” of sorts in the post The 2-Yr Tells All; history tends to rhyme.

In this post, we’re going to cover:

• Where the stock market is priced from a technical perspective

• The handful of economic indicators that predict “market bottoms”

• How I’m navigating the current macro-environment

📈 Technically Speaking

Before we get started, I want to make sure everyone knows that I am in no way, shape, or form a technical analysis wizard — that’s Katie Stockton.

With that being said, there are a few “moving averages” to keep an eye on as it relates to where the stock market might be headed.

Starting with the daily chart for the S&P 500 — generally speaking, things are looking fine. You’ll see three colored lines illustrated in the chart above — the 21-day, 60-day, and 200-day moving averages.

From a technical perspective, when the 21-day and 60-day moving average are both above the 200-day moving average — a “bullish golden cross” has formed. This is usually a good thing.

You all might remember me talking about the “Stages” of bull and bear markets from this post. Essentially, when a stock is trading above its 200-day moving average, that’s usually a good sign. This proves to be especially good if the stock price has “tested” and “bounced off” the 200-day moving average a few times to prove its strength.

The examples before are illustrations of the Nasdaq moving between Stage 1 — 4 throughout the last several years.

The S&P 500 saw a relatively strong bounce off of the 200 day moving average just the other week — and (as of writing this) we’re still trading above it. Until we see a decisive move below the 200 day moving average — things are holding up just fine, technically speaking.

However, when we zoom out — the price action tells us a very different story.

The bright blue line is the 30-month moving average, and the orange line is the 10-month moving average.

As you can see, when the 10-month moving average is above the 30-month moving average — we tend to do well for a prolonged period of time. Some might even describe that prolonged period of time as a “bull market.”

However, when the 10-month moving average is below the 30-month moving average — things don’t look the best. Sure, we experience bear-market rallies — but not a true bull market.

As you can see above — the 10-month moving average is still decisively below the 30-month moving average, not good.

☑️ Bear Market Checklist

From a technical perspective, we’re looking “decent” in the short-term. However, from an economic perspective — things haven’t looked much worse.

Throughout the last seven bear markets, there were always a handful of economic events that had to take place before the stock market found a “bottom.”

These are those events.

If history tells us “X usually happens before things get better,” but “X” hasn’t yet happened in our current bear market cycle — are things ready to get better? 

Probably not — but I’ll let you make your own conclusion!

1️⃣ Unemployment Spikes:

As you all might recognize from this post — the graphic below illustrates each of the last five times inflation has spiked above 8% as measured by the Consumer Price Index, the unemployment rate had to spike above 6% to quell inflation.

Not only is that statistic working against us — but before a “market bottom” officially formed during 6 out of the last 7 bear markets, unemployment spiked by at least +2%.

I recently came across a wonderful Twitter thread shared by Eric Basmajian of EPBResearch — stating that construction employment has been what’s saving the economy from a recession.

However, he argues it won’t last much longer.

Specifically, Eric states that residential construction unemployment is a primary driver for recessions — and as we all know, newly issued building permits are experiencing a sharp decline. Less permits leads to less units under construction — leading to less residential construction workers employed.

2️⃣ 2-Yr / 10-Yr Spread (Yield Curve)

This is one of the most popular and widely trusted “indicators” for recessions — as every single time the US experienced a recession, the yield curve had “inverted” shortly beforehand.

However, the yield curve (the difference between the 2-yr and 10-yr US Treasury Bills) has been inverted for a while now — but, what about “going back to normal?” 

In each of the last 6 bear markets dating back to 1982, the yield curve had begun to steepen and “go back to normal” (above the black line) before the market bottomed.

Currently, the yield curve is the most inverted it has been since 1981 — alluding to continued volatility in the markets.

3️⃣ 2-Yr Yield Peaks and Begins to Fall

As shared in November, the 2-Yr Treasury does a wonderful job of helping us predict the end of past bear markets — and recessions.

A rising 2-Yr yield is usually a sign of future rate hikes by the Federal Reserve — something that doesn’t exactly cause “joy” in the stock market.

In the previous 6 bear markets, the S&P 500 did not decisively “bottom” until the 2-Yr yield had peaked and fallen by -50bps from its recent all-time-high.

As you can clearly see above — we’re still peaking. The 2-Yr just made another recent high for the cycle, now standing north of 5.06%.

4️⃣ US Purchasing Managers Index (PMI)

The Purchasing Manager’s Index (PMI) is an index of the general direction of economic trends in the manufacturing and services sectors. Essentially, it tells investors if market conditions are expanding, staying the same, or contracting. 

Over 50 — expanding, Under 50 — contracting.

In 6 of the last 7 bear markets (excluding 1973), the PMI improved in relation to its 12-month low before the S&P 500 bottomed. Generally speaking, as long as the PMI is declining, it’s hard for the stock market to find a bottom.

However, as you can see above we might be witnessing this bottom in real-time.

The February PMI data was released on March 7th and it reported the strongest monthly activity in the last seven months.

It’s certainly welcomed data — however, I’m not yet ready to call it a trend.

☑️ Miscellaneous

The above are just a handful of economic indicators that I’m following — there are several others, such as the “Rule of 20,” and the “equity risk premium (ERP).”

More about the “Rule of 20.”

More about the “Equity Risk Premium.”

👉 How I’m Navigating Everything

As you all know, I try to be as transparent with you as possible. With my money, my ideas in real time, my updated perspectives on specific companies, and everything in between.

So here’s the deal — as my friend Caleb Franzen says, “I’m a net-buyer of assets.”

There are two things I’m laser-focused on right now from an investing perspective:

• Yield on Cost

• Operating & Free Cash Flow

📈 Yield on Cost

You’re smart, you read Rate of Return — but in case you weren’t entirely sure what “yield on cost” meant, it’s essentially the “cash-on-cash returns” from your dividend-paying stocks.

I have every intention to take advantage of this bear market to both purchase quality dividend-paying companies at discounted prices (Lowe’s, Home Depot, W.W. Grainger, Visa, Tractor Supply Co., etc.) as well as average into positions that will continue to increase my yield on cost.

Just to put this all in perspective, Warren Buffet invested $1.3B into Coca-Cola in 1988 — yielding him 400M shares of stock. Today, those 400M shares of Coca-Cola stock pay him $704M in annual dividends.

👉 He makes his entire investment back from Coca-Cola every two years. 

📈 Operating & Free Cash Flow

We’ve talked about this one before, but let’s make sure we’re all on the same page. During times of loose monetary policy (low interest rates), growth is the name of the game.

Because debt is so cheap, “we’ll be profitable eventually” is actually just a shoulder shrug — the debt you’re using to double revenue every year only costs 2%, might as well use it to grow quickly, right?

Cheap debt is gone and now it’s time to become a self-sustaining business.

Here’s what I mean by that — if a business was using cheap debt to fuel their operations, pay for their marketing, and acquire their customers .. it’s sort of like putting everything you do on a credit card.

Sure, it brings you joy in the near-term — but eventually, you’ll need to actually get a job, make a budget, and live on less than you make.

2020 & 2021 was a wild time for the public markets — unprofitable company after unprofitable company were making their public debuts, and investors ate it up!

However, many of those companies have proven to just be exactly that — unprofitable. 

Only a select few will prove that they deserve to be assigned value from investors — examples that come to mind:

• Hims & Hers Health (HIMS)

• Monday.com (MNDY)

• Cloudflare (NET)

• Datadog (DDOG)

• MongoDB (MDB)

👉 Many names have already experienced their “market bottoms” for this bear market cycle — and I have reason to believe it’s the companies who have proven (or will soon prove) to investors their ability to be operating and free cash flow positive.

⚡️ An Exciting Update

As my paying subscribers know, I go into immense detail about my portfolio holdings (weightings, SA Quant ratings, YOC, price target, etc.) in my Portfolio Tracker.

However, after 200+ of you signed up for Quantbase and invested $500K+ toward their strategies I realized I should do my best to find a solution that more intimately tracks my own money moves — not just an algorithm’s.

I was recently accepted as a “Leader” on Follow — allowing anyone and everyone the ability to subscribe to my profile, unlocking more resources and ideas for you.

This includes podcasts I’m listening to, books I’m reading, weekly market updates — but more importantly — the opportunity to SuperFollow (something that literally no other company has been able to legally accomplish in the United States).

Similar to how I unlocked Quantbase’s algorithm to existing paying subscribers for free — I want to make this act of “automation” as reasonable as possible for anyone eager to get involved.

Subscribing to my Rate of Return publication on Substack is $13 / month — and included in that subscription is a ton of updates (stock ideas, industry analysis, economic updates, livestreams, etc.)

However, Substack doesn’t exactly give me a lot of flexibility in relation to pricing — Follow is my solution to that. 

At $7 / month (half the price), you’ll be able to unlock access to my most important market updates (Week in Review), as well as the opportunity to SuperFollow any “Leader” on Follow’s platform.

Click here to learn more about SuperFollowing and why it’s so important.

To subscribe to my publication on Follow, unlocking my most important market updates and granting you access to SuperFollow Leaders — CLICK HERE.

It’s 100% free to try for 1-month, so give it a whirl and let me know your thoughts.

All in all — the technicals are holding up, while the same can’t be said about the economy. Despite this harsh reality, it’s a stock picker’s market.

Companies who will be able to prove to shareholders their ability to produce operating and free cash flow will be handsomely rewarded — as we’ve already begun to see with Hims and Hers Health (HIMS) and Monday.com (MNDY).

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.