“What strikes me about really good money managers—they don’t get attached to their ideas… When a trade is wrong, he will just cut it, move on, and do something else” ~ Scott Bessent via Hedge Fund Market Wizards
Summary: Our thesis remains steady: the SPX is in a strong primary bull trend and poised to move higher. While the market looks stretched in the short term and a modest pullback (4-7%) is likely in the coming weeks, robust liquidity, solid breadth, and healthy internals should keep any dip contained. Persistent corporate buybacks continue to underpin the rally. I also cover two bombed-out industries poised for recovery and a USD pair setting up for potential mean reversion.
***The MO port is up +24% ytd, and we’re not seeing a shortage of great opportunities in this market. If you’d like to join me, the MO team, and our Collective of sharp, supportive investors and traders as we navigate these markets, then click the link below. I look forward to seeing you in the group.***
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1. A persistent bid under the market is being driven by record corporate buybacks. S&P 500 companies spent $293.5 billion on buybacks in Q1—a new high. Recent Fed proposals to ease banking regulations could free up $70 billion in capital for the six largest banks, much of which is earmarked for buybacks and dividends, helping push financials like XLF to new highs.
Additionally, uncertainty from Trump’s trade war has led many companies to cut CAPEX and redirect cash to buybacks. This persistent flow of buyback demand is a key reason the rally continues to defy bearish expectations. Read my paper here on how buybacks are one of the most critical yet underrated drivers of US bull markets (link here).
2. In strong bull markets, you want to see cyclical sectors leading the way, which is precisely what we’re seeing now. Chart via SentimenTrader.
3. This chart also from SentimenTrader shows the forward returns after tech, industrials, and financials lead sectors to record highs. Not too shabby.
4. Breadth remains not only supportive, but participation is expanding, revealing the budding strength underlying this move.
5. The NYSE Advance-Decline Line just made new all-time highs.
6. Russell 3K’s % of members above 50 & 200-day moving average is high and rising. Not bearish…
7. Semiconductor breadth, a highly cyclical industry that is a good risk-on/off tell, recently rose above 80%, placing it squarely in the bullish zone, which is also not bearish…
8. We expect the momentum leaders (Tech, Communications, Industrials, Financials, Defense/Aerospace) of this cycle to continue leading until valid recession signals begin to emerge and this long bull market finally comes to an end. With that said, we’re already fishing in the markets that we think will lead the next cycle up. This will be commodities, hard assets, precious metals, and things like rare earths. REMX is bombed out after falling over -93% from its 2011 highs. It’s holding around a significant support level at $35. Not a bad price to buy, place a stop below 35, and then stash away for 5+ years.
9. Another bombed-out industry is the clean energy space. ICLN saw a roughly -70% fall from its 21’ highs. It’s since put in four consecutive monthly bull bars, something it hasn’t done since its major 2020 bull run. This shows a changing regime in the supply and demand dynamics, and this is occurring amongst a quite bearish consensus narrative regarding the space.
10. One of our most bullish thematics over the past 18 months has been Defense & Aerospace. We’re long RHM, RKLB, IMP.TSX, and AMTM. I’m considering adding TDY to this basket. It’s a relative momentum leader moving to new all-time highs. And it’s about to complete an inverted H&S continuation pattern (seen better on a daily or weekly chart).
11. The dollar continues to trade in a way that suggests we’re at the start of a cyclical bear in the USD. However, bear markets don’t move in straight lines, and as I outlined two weeks ago, the positioning and sentiment in DXY has gotten ahead of itself. It’s also deeply overextended.
So, while we remain short USD against a number of pairs (EUR, CHF, MXN), we’ve moved up stops and are now putting in buy stop orders on USDSEK to see if the market can pull us in long.
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Thanks for reading.
