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Stock Picker's Market

It may be best to take a selective and disciplined approach to investing. Active investment strategies can play an increasing role in helping investors navigate a volatile and complicated world. Stock and sector selections may decide if investors make or lose money this year.


Historically, business cycles and stock market cycles are highly correlated. S&P sectors have different economic drivers and will perform differently at various stages of a business/economic cycle. Individual companies also will perform differently at different phases of their corporate cycles.


The key to outperformance remains the same – stay ahead of changing economic conditions with the right sectors and stocks.


With fewer sectors to select from versus individual stocks, sector selection requires less due diligence, allows for better diversification, and minimizes inherent stock-specific risks. Sector ETFs have become the overwhelming investment vehicle of choice for many investors.


Academic and professional studies have shown the difference in annual returns between the best and worst-performing sectors in the S&P 500 Index can exceed 30% over the long term. The difference in returns of the top and bottom-performing sectors each year can dramatically impact the overall returns of an investment portfolio.


Last year showed a clear distinction between the winning and losing sectors, as evidenced by the year-to-date performances of the S&P sectors.


Another metric that measures the internal health of the stock market is market breadth. Market breadth analysis remains a decisive factor that can help uncover the sustainability of a stock market rally.


If the October 2022 low is a pivotal stock market bottom, then breadth should begin to expand across different stock markets. Broad market participation is also one of the hallmarks of a sustainable rally.


Advancing issues minus declining issues and other market breadth indicators can help evaluate if investors are actively or passively involved in the rally.


Many investors also believe a top-down analysis (macro) and bottom-up analysis (individual stocks) are needed to confirm stock market rallies.


The number of stocks trading above their respective 50-day and 200-day ma moving averages is a quick way to identify stocks trading in bullish uptrends. The greater the number of stocks in solid uptrends can solidify market bottoms (Oct 2022 lows) and sustain bull rallies.


More than half of the stocks in a stock market index are trading above their respective 50-day and 200-day moving averages, which suggests investors are actively participating in the rally.


Enclosed are three (3) US stock market indexes, including the S&P 500 Index (SPX), S&P 400 Mid-cap Index (MID), and S&P 600 (SML).


SPX – 211 stocks (42.2%) are trading above their 50-day and 200-day moving averages.


MID – 116 stocks (29%) are trading above their 50-day and 200-day moving averages.


SML – 144 stocks (24%) are trading above their 50-day and 200-day moving averages.


The above statistics suggest investors favor the safety of the large-cap SPX index, evidenced by 42% of SPX stocks trading above their respective 50-day/200-day moving averages.


If the numbers improve above 50%, this further helps to solidify the Oct 2022 bottom (3,491.58), leading to SPX retesting the all-time high (4818.62 – 1/4/22).


The S&P Mid-cap and S&P Small-cap show 29% and 24% of stocks are trading above their respective 50-day and 200-day moving averages, suggesting dramatic improvements are required before investors actively buy into these two stock markets.


Remember, near a pivotal market bottom, Small-caps and Mid-caps tend to outperform their larger counterparts, at least from a relative basis.


Until the rally broadens out to other stock markets, it is best to be selective and focus on stocks that have well-defined technical bases and preferably trading in solid intermediate-to-longer term uptrends.


Source: Chart courtesy of StockCharts.com (SPX - 211 stocks))

Source: Chart courtesy of StockCharts.com (MID - 116 stocks)

Source: Chart courtesy of StockCharts.com (SML - 144 stocks)

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