By: Jeff Cooper

Hit and Run Morning Stock Report: April 4, 2023

What Lies Beneath

People ask why I think this is a bear market rally.

Allow me to answer the question.

While cycles may seem ethereal and price can be subject to interpretation,

Something lies beneath.

What lies beneath?

The aim of the stock market is to deceive.

The deception lies beneath the surface in the big cap FAANG-like stocks which have distorted the SPX.

Therein lies the deception because the SPX is a widely accepted measure of market performance…

THE Benchmark.

As of last week just 10 heavily WEIGHTED components of the SPX -- AAPL, MSFT, AMZN, NVDA, GOOG, BRK.A, TSLA, UNH and META are collectively responsible for over 27% of the index’s reported fluctuations.

The combined influence of these ten companies far overshadows that of the remaining 490 companies, producing a misguided impression of The Market.

During periods of end-of-quarter Window Dressing, the upward trajectory of the top 8 companies is independent of the performance of the remaining 492, rendering the SPX, in a word, deceptive.

To wit, 492 stocks are down for the year

If you are a money manager, you have two considerations going into quarter-end:

  1. You want to look smart as if you were in the best performing names, and
  2. You don’t want to look under-invested.

If you have too much cash on the books and the market has been rising of late, you have to put some money to work.

If you are cautious on the market, then there is an added incentive to buy big liquid caps as you can more easily extricate yourself.

The not so subtle quarter-end mark-up late last week got the foam in FOMO percolating into former growth glamours like MDB, ZS, BILL, ABNB and NEWR.

They all refused to follow-through on Monday, jettisoning much if not all of Friday’s gains.

Follow-through is key.

Be that as it may,the SPX was set to leave a Lizard sell signal and a Soup Nazi sell signal on Monday -- up until the last half hour when the runoff elicited a close near session highs.

So let’s take a look at the SPX versus an equal-weighted SPX.

The difference between the two stocks is stunning and severe.

The SPX weighted index surpassed its early March peak significantly.

The equal-weighted average of all 500 stocks was far less robust closing significantly below the early March peak.

An analysis of the behavior of the stochastic of the SPXEW (SPX equal-weighted): SPX ratio shows whenever it spiked above 80 and then fell below it, new lows followed.

Despite end-of-quarter shenanigans, the expectation remains for potentially dramatic declines in April.

Window Dressing peaked on Friday, March 31.

On Monday, the first day of Q2 we saw the reversal of that window dressing that had driven the capitalization-weighted Indices to new March peaks on Friday.