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Don’t look up: where are we with markets in 2023?


”Don’t look up” – you might see a white ba(f)lloon – where are we in our 2023 market outlook?

We are now well through January, so it is time for a follow up on our 2023 outlook from Christmas 2022.

Christmas and January 2023 carried on the strong Q4 2022 recovery based on plenty of positive inputs. Growth has been better than expected and inflation and energy prices have been falling, translating into lower long-term rates, but higher shorter rates, fueling the Fed´s “higher for longer” rate narrative, which the bond market does not seem to believe; the question is, who will be wrong?

The fundamental situation: S&P 500

These positive fundamental inputs have translated into a price rise into our rose-tinted glasses objective above 4,070, being ,.115-50 and 4,2820 – 4,312; the levels can be identified on the S&P500 chart below. Having arrived, we still believe this area is the level to leave the market.

The fundamental side has been better than most expected on the surface, inflation having come down from very high levels, and short term it looks as if we still have one or two months of lower and supporting inflation figures in store for us. This is a positive for the short-term bull, but a threat over the longer term. If the stock markets are driven by good “externals” only, then that could turn out to be a ‘white balloon’. Stock performance is driven by their own efforts, “the internals” over the longer term, including their own earnings and outlooks, and this outlook is still not glossy.

Beyond this, the macro externals of geopolitics from Ukraine and China have the scope to turn very bad very fast. The battle in Ukraine between NATO and Russia looks to be intensifying with more and heavier weapons, which cannot end well. The West has the best tech and quality weapons, but Russia has a staggering quantity of weapons.

The West, NATO and US will keep Ukrainians giving their lives as long as they can provide enough military support, and the Russian leadership will keep shelling Ukrainian territory, people, and assets as long as they feel it is necessary; the diplomats have clearly failed in their job here. Instead of talking and seeking a solution, diplomats seem to be securing the weapons industry more orders and they are probably collecting good commissions and new club memberships for their “efforts”.

The real winner here is China, and their stock market has been the best performing over the last three months, for multiple reasons. Looking back, China was un-investable in 2022, and suddenly, China is again open for business as well as free from COVID restrictions.

Inflation behaviour in certain products like food, building materials and salaries is not symmetric, meaning it can go up, but it won’t go down again as easily. The inflation picture will again become fragile if energy prices start rising again, and that will be reflected very quickly in the numbers, all leading to higher yields in the longer end of the curve as well as in the IG and corporate bond market segments.

We are in a war economy with stressed and disrupted supply chains, so it will not take much before this becomes an issue again. And with the flagged QT, we could face a credit event later in 2023.

The technical side of things

The technical side of things is still negative in my longer term outlook, but we are still in a shorter term corrective up-leg, that looks to be in its final stages.

The two charts below will explain how I currently think things could play out (views are updated and sometimes reversed – being wrong is not a problem – staying wrong is!)

My preferred view is that the S&P 500 has made its first major leg down from the top at 4,818 in January 2022, down to the low in October 2022. Elliott Wave technicians can label this a larger A or 1st wave down, where the current up move since October is a corrective B or 2nd wave up, which should play out in three sub-legs, and we are in the last part of this third leg in the B or second wave up.

If correct, this will show itself as an a-b-c structure upwards, where the B or 2nd wave should be 61.8% or 100% of the 1st or A wave down. 61.8% of this move down is the thin blue line at 4,311, which also coincides with a structural top (clusters happens often).

The internal mathematics of the B-wave could lead us up to 4,282 based on close, or even up to 4,389 (based on open future prices, not our preferred target, but still a possibility).

Zooming in, the last corrective move up must have five internal waves, where the first four are visible. On Friday we got a downward test of the 4,070 short term structural and old horizontal swing level (very important), so the short term bullish picture is still intact and well tested, but 4,070 needs to hold on close. A close below 4,070 negates the short-term positive outlook towards 4,300 +/- 1 pct.

SandP500 Chart

S&P500 Index on daily resolution, Source TradingView

Let’s have a look at the Russel 2000, the US small cap index, that more closely reflects the state of affairs in the US economy and the situation with investors’ P&L.

The overall structure is the same as with S&P500 (not surprising), here very well contained in its upward channel, but it has not even recaptured 50% of the losses from the top. This behavior between large and small cap is normal in top scenarios. The R2000´s short-term picture is also still bullish, but also here, the R2000 needs to hold the lows from Friday, else the party turns sour.

Russel2000 Chart

Daily Russel 2000 index, Source TradingView

The two charts above have an uncomforting similarity with the S&P500 and DJIA from March 2000 till January/March 2002, whereafter the market tanked to new lows. This fits very well with our overall market expectation from back in early 2022 and just before Christmas again.

If you have been stressed by the 2022 volatility and caught by surprise, do reduce many of your long positions. I see and believe there will be plenty of opportunities and sector shifts going forward where you can re-enter, probably at lower levels, potentially much lower levels. I will be selling 60-80% of my current positions and put on shorts through call option selling and buying of inverse index ETFs on the broader market.

Shorter term swing Level – where am I wrong – or right?

As long as the S&P 500 stays above 4,070 this bull train has oxygen and is still alive. This equates to the December top in R2000 at 1,892, both based on closing prices. Above the two levels we still have the wind behind us and the sun shining, but below these two levels, the storm could be coming, and I expect this to occur.

Stay safe, Your Truly

Henrik Mikkelsen is a Strategist, Investment Advisor and Business Developer with Iridis AG, an investment management and corporate advisory firm in Zug, Switzerland. Henrik has more than 30 years of experience from investment banking and commodity trading, running strategies for clients and himself, as well as writing about markets and giving lectures on technical analysis and risk management. 

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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