Throughout most of 2023, the consensus expectation was that the economy would enter a recession in the first half of 2023. Instead, we saw one of the best rallies in the NASDAQ on record, which has now led investors to believe that this FED might actually maneuver a soft landing.
Then, on July 27th, equity markets topped and have been trending sharply lower, while inflation fears have started trending higher. With the amount of cross currents in this market, most investors are now confused as to whether they should buy this dip in stocks, or get out now before the real volatility begins.
On one hand, we are coming off of the first real bear market since 2009 with the S&P 500 up +11% for the year, and the tech-heavy NASDAQ-100 up +30% this year. This is after the S&P 500 has dropped -8% from the July high, while the NASADAQ-100 is down only -9%. Considering that both of these indexes are still up double digits for the year, this appears to be an obvious spot to buy the dip.
On the other hand, most inventors are not aware that the Russell 2000 Index, which is the goal to benchmark for small cap stocks, is down -4% for the year, while the equal weighted S&P 500 is down -1.5% for the year. We’re also seeing the Financial Sector down -4% for the year, while long-dated Treasuries are continuing their downtrend by being down another -13% this year.
Because we believe we are approaching a major inflection point, we thought it would be helpful to share our thesis on both the broad market, which includes levels to monitor, as well as the macro back drop that is unfolding. We hope this will shed some light on the confusing context we are seeing in 2023. While many stocks and markets have topped, we do believe that the S&P 500 and NASDAQ-100, led by choice big tech names, can make one more high into the year-end before putting in a larger top. We also provide clips on the essentials 3 stock portfolio, with levels to monitor, which can help investors better manage risk in the current environment.
Broad Market Scenarios – In this clip, the I/O Fund portfolio manager, Knox Ridley, goes through various markets, including the S&P 500, NASDAQ-100, ARKK, Small Caps, and more. While many of these markets have likely topped, we lay out the path where the S&P 500 and NASDAQ-100 continue higher into late Q4-early Q1. We also lay out what levels must hold in order for this scenario to play out.
Macro – Equities have rallied on stronger than expected economic growth and lower than expected inflation. In order for markets to push higher, this trend needs to continue. We will need to see energy prices pull back soon along with the US dollar in order to provide the necessary backdrop for equities to push higher.
Nvidia (NVDA) – As long as we hold $340, NVDA could easily push into the mid to high $500s in the next rally.
Microsoft (MSFT) – Unlike many stocks, MSFT has the potential for a new high. As long as we hold the $301 – $292 region in this correction, we should see one more high.
Netflix (NFLX) – Though NFLX has pulled back quite a bit, we still do not think it is low enough for us to start buying again. We took ample gains around the highs, and being patient before we start buying again.
What’s Next?
In mid to late July, the I/O Fund warned our premium members of a coming pullback. We locked in gains around the top and began actively hedging our portfolio to mitigate the down moves. We have also started buying specific tech stocks recently based on our broad market analysis. If you are confused on what’s going on in the markets, we encourage you to join us for our weekly webinars, held every Thursday at 5 Pm EST. Next week we will be discussing our strategy with our AI stocks, as well as lay out our game plan to avoid the next bear market, which we believe is closer than most think.
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