December 11-15, 2023

Tactical Signal 9

Helped by the positive momentum and breadth of the recent equity rally, Sowell’s technical indicators have remained constructive and remain grounded in full position (100%).

Equity markets maintained their upward momentum, extending the November rally into the first week of December, accruing an additional 0.84% MTD. Against a backdrop of subdued news and economic activity, major indicators presented results below expectations, setting a positive tone for investors leading to this week's Federal Open Market Committee (FOMC) meeting. Notable metrics, including Factory Orders (-3.6%), JOLTs job openings (8.7 million), ADP Monthly Nonfarm Payroll (103k), and Wholesale Inventories (-0.4%), collectively signaled a desirable deceleration in economic momentum concerning inflation—a trend aligning with the Federal Reserve's objectives.

Consumer Credit defied projections in a nuanced development, rising only by $5 billion, albeit falling short of expectations. This suggests a potential tightening in consumer spending—a resilient market segment that has defied conventional expectations.

Notable, tech giants Apple and Google demonstrated resilience, each gaining over 2% for the week and approaching their 52-week highs. Apple's ascent is speculated to be tethered to the anticipation surrounding their forthcoming rollout of AI applications. Simultaneously, Google disrupted the market with the revelation of its latest AI language model, Gemini, poised to surpass the capabilities of ChatGPT.

As we navigate the final 15 days of trading in 2023, the focal point turns to this week's Consumer Price Index (CPI) report and the much-anticipated FOMC meeting on Wednesday—the last of the year. Fed Chair Powell's unwavering commitment to a hawkish narrative and the pursuit of a 2% inflation target necessitates careful consideration of the upcoming policy actions. Additionally, in the wake of the holiday spending surge initiated by Black Friday, it would not be unexpected if the narrative of restrained inflation persists into the unfolding landscape of 2024. Prudence dictates refraining from second-guessing the Federal Reserve's forthcoming decisions against this dynamic economic backdrop.

"We can only see a short distance ahead, but we can see plenty there that needs to be done." 

– Alan Turing, Father of Modern Computing.

Move Over FAANG, Make Room for the "Magnificent Seven"

In the chronicles of financial markets, the FANG stocks, a cadre whose saga commenced in 2013, metamorphosed into the FAANG ensemble with Apple's grand entrance in 2017. This consortium, an epitome of growth, predominantly in the technological realm, swiftly doubled its stock prices within the span of a few fiscal breaths. However, the FAANG nomenclature weathered alterations, the tempest of the 2022 correction, and the advent of new luminaries powered by the brilliance of artificial intelligence. Behold, the stage is now graced by the "Magnificent Seven."

Against the recent backdrop of financial resilience, the Nasdaq and the S&P 500 have demonstrated commendable returns of 38.7% and 21.8%, respectively, year-to-date in 2023, adeptly compensating for the setbacks of 2022. Notably, the lion's share of these gains can be directly ascribed to the Magnificent Seven: Apple, Microsoft, Google, NVIDIA, Amazon, Meta, and Tesla. The astonishing facet of this lies in the fact that, with a mere 15 trading days remaining in 2023, they command seven of the top ten positions in the S&P 500 by market capitalization, boasting an average return of 97% in the current year. Furthermore, five of these illustrious stocks presently wield market capitalizations exceeding the formidable threshold of $1 trillion, with Apple and Microsoft on the precipice of the extraordinary milestone of $3 trillion in market capitalization.

Within cap-weighted indices, the gains orchestrated by the Magnificent Seven are the veritable cornerstone, constituting a formidable "70%" of the S&P 500 gains in the ongoing year. In stark contrast, the remaining 493 stocks collectively returned a modest 6.5% year-to-date. Any experienced money manager who chose to underweight or short any of the Magnificent Seven in 2023 would have found themselves mired in a sea of underperformance against the S&P 500. This underperformance would be exacerbated for those who overlooked the transformative potential of NVIDIA, a solitary virtuoso that has delivered an extraordinary return of over 225% year-to-date.

Consider that in the tapestry of 2023, where the force of artificial intelligence drives the thematic currents; we find ourselves at an early juncture in the quest for understanding what lies ahead. As aptly articulated by David Brooks, "it is literally unknowable whether this technology is leading us to heaven or hell." The narrative of the Magnificent Seven, orchestrated against the backdrop of AI influence, continues to unfold, and we, as discerning observers, remain poised on the precipice of yet another financial revelation.

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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