VIDEO: Is The Tide Turning for Stocks?

Welcome to my latest video presentation. The article below is a condensed transcript. For additional details and several charts, watch my video.

As a kid growing up along the Massachusetts coast, I did a lot of sailing. As a sailor you learn that you can’t direct the wind, but you can adjust the sails. The same goes for investing. You can’t fight the market’s momentum. Nor can you fight the Federal Reserve. However, you can adjust your portfolio to the changing winds and tide.

Okay, I’ll stop with the sailing metaphors. Here’s my point: The prevailing trends are bullish. The tide is turning…toward growth.

The benchmark SPDR S&P 500 ETF Trust (SPY) has risen above both its 50- and 200-day moving averages. A rising moving average indicates that the security or index is in an uptrend, while a declining moving average indicates a downtrend. The shorter the moving average, the sooner you’ll see an actual change in the market.

The CBOE Volatility Index (VIX), aka fear index, has been in a steep decline, falling to below 15 after reaching a recent high of 21. A VIX reading below 20 suggests declining stress and fear in the markets; a reading above 20 indicates the converse.

The New York Stock Exchange Advance/Decline Line (NYAD) has been rising, a sign of improving market breadth. When NYAD rises, it’s a bullish trend, because more stocks are advancing than declining. A falling NYAD line is bearish for the opposite reason.

The benchmark 10-year U.S. Treasury yield has fallen from the 5% high it reached last month, to settle at about 4.55%. The decline in the 10-year Treasury yield suggests that we’re close to reaching “peak rates,” as Wall Street’s inflation worries subside.

Earnings season has been encouraging, too. Overall, 81% of S&P 500 companies have reported actual results for Q3 2023 to date. Among these companies, 82% have reported actual earnings above estimates, which is above the 5-year average of 77% and above the 10-year average of 74%.

However, Wall Street has expressed disappointment with some companies, even when they beat expectations. A notable example last week was Apple (NSDQ: AAPL), which surpassed expectations on the top and bottom lines, but analysts still saw signs that the company is losing momentum. Shares of the Cupertino giant sank in the wake of its quarterly report card.

That said, as of market close November 3, the S&P 500 index is reporting higher earnings for the third quarter today relative to the end of last week and relative to the end of the quarter.

The blended earnings growth for the third quarter is 3.7% today, compared to an earnings growth rate of 2.6% last week and an earnings decline of -0.3% at the end of the third quarter (September 30). “Blended” combines actual results for companies that have reported and estimated results for companies that have yet to report.

Eight of the 11 S&P 500 sectors are reporting year-over-year earnings growth, led by communication services, consumer discretionary, and financials. Three sectors are reporting a year-over-year decline in earnings: energy, health care, and materials.

These factors all contributed to a sharp rally in stocks last week, with the main U.S. stock market indices posting the following weekly gains: The Dow Jones Industrial Average +5.1%; the S&P 500 +5.9%; and the NASDAQ +6.6%.

The falling price of crude oil has been a major factor driving inflation expectations lower. Economic deceleration points to less demand for oil, which has been weighing on prices. That’s a disinflationary trend.

The Fed held rates steady at its meeting last week, as widely expected, but it took a more moderate stance toward upcoming rate decisions. The Fed’s tightening cycle seems to be nearing an end, which is a powerful tailwind for stocks.

During the past two months, stocks have slumped as rising rates dispirited investors. But as we approach the end of the fourth quarter, we face increasing odds of a rally.

Seasonality also is in our favor. Historically, the final two months of the year have been positive for stock-market returns. That means the declines of the last two months have created buying opportunities.

The week ahead…

The coming days will be light in terms of economic reports and events: wholesale inventories (Wednesday); initial jobless claims; Fed Chair Jerome Powell appears on a panel hosted by the International Monetary Fund (Thursday); and consumer sentiment (Friday).

As I’ve noted above, a major factor driving stock market gains right now is the collective feeling on Wall Street that we’ve witnessed peak interest rates.

Which brings me to the utilities sector.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

As you position your portfolio for next year, turn to utilities stocks. These stable, high-dividend stalwarts provide shelter from the storm.

The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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