With Q1 in the books, we saw stock prices generally rise across all indices. We will kick off earnings season with the banks to report at the end of the week. Analysts estimated are expecting a decline of -6.6% from last quarter which would mark the biggest earnings decline since Q2 2020.
Below is a chart mapping out the 12-Month earnings per share estimates vs the change in stock prices over the last 10 years. With expectations being negative, we will be looking for “less bad news” than what the market expects.
Earnings results will be company specific so results will vary across the board. With the general expectations being negative, it is important to look through these reports to see if there is a more positive story in the future or if the earnings decline will continue.
Gauging where the investor sees equities going forward has been a reliable way to evaluate the herd bias stands and what will happen next. The worse the sentiment, the better the stock market responded in the future months on a historical basis. This goes by Warren Buffett’s adage that we continue to use, “Be fearful when others are greedy and greedy when others are fearful.” Right now, the fear in the market has surpassed the March 2009 lows.
The chart above shows the investor sentiment in the blue line. The further it drops, the more bullish investors should be on stocks. Historically, when this indicator is at this level, the 12-month S&P 500 returns were positive 94% of the time with a median return of 22%.
Bullish Technical Set Up
Technical indicators can be helpful to see where the market goes next, typically a shorter term set up. In early April, we received a positive signal in the Zweig Breadth Thrust. This is a technical indicator used in the stock market to measure the strength of market movements. It was created by the late market analyst, Martin Zweig.
The Zweig Breadth Thrust indicator is calculated by dividing the number of advancing stocks by the sum of advancing and declining stocks. When the resulting value exceeds a certain threshold, typically 61.5%, it is considered to be a bullish signal for the market.
The chart above shows the SP 500 with green data points when this indicator became positive. The 1-month return is positive 92.9% of the time, 3-month return at 78.6% and the 6-month & 12-month return has been positive 100% of the time. The average 12-month return when this indicator is positive has been 23.3%.
The theory behind the Zweig Breadth Thrust is that when a large number of stocks are participating in an upward trend, it is a sign of broad market strength and a reliable predictor of a continuing bull market. Conversely, if the indicator falls below the threshold, it suggests that the market may be losing momentum and could be vulnerable to a correction or bear market.
News at Lake Street
We are excited to announce that Justin Terzo, CPA, has been named to the 2023 Forbes Best-In State Wealth Advisors List! This year, Justin ranked 26th in Chicago and this is his 4th time receiving this recognition to the list.
The recipients of this award predominately consist of big bank and wire house advisors, which leaves Justin as one of the few advisors that works at an independent firm to be given this award. Congrats to Justin for all his hard work and dedication to his clients!
Articles We’re Reading
UBS could cut 20-30% of Credit Suisse jobs (Reuters)
Oil Prices Surge the Most in a Year on Surprise OPEC+ Supply Cut (Investopedia)
Apartment building is near a 30-year high, but more new units aimed at higher-income buyers (CNBC)
Russian offensive has failed to make significant gains in eastern Ukraine and appears to be petering out (The Hill)
For the Month Ending 3/31/2023 (Cumulative Returns)1
Did You Know?
The first paper money in the United States was issued in the month of April. Continental currency was the first paper money circulated by the Continental Congress of the United States during the American Revolution, authorized on April 11, 1775. These paper bills were intended to finance the war effort against Great Britain, as the colonies had no established currency system at the time.
Continental currency was issued in various denominations, ranging from $1 to $80. The currency featured patriotic designs, such as an eagle holding a ribbon that read “E Pluribus Unum” (“Out of many, one”) and a motto that read “Mind Your Business”. Initially, the currency was widely accepted and helped fund the war effort. However, due to a lack of backing by gold or silver and the printing of large amounts of currency to finance the war, the value of Continental currency rapidly declined.
As a result, inflation skyrocketed, prices soared, and the currency became virtually worthless by the end of the war. The phrase “not worth a Continental” became a common expression to describe something of little or no value. After the war, the US government replaced Continental currency with a new currency system based on the US dollar, which was backed by gold and silver.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
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