Although there has been internal improvement since late 2022-early 2023 (Figure 1), equity market proxies (plus sectors and individual stocks) rarely go up in a straight line because “things” get overbought short-term. Like now. With the Bulls still in control, don’t Within the context of a multi-month trading range, internal measuring statistics (outperformance by equal-weighted equity index proxies, improving number of new 52-week highs/contracting number of new 52-week lows, NYSE Advancing volume, etc.), aided by a further decline by the U.S. Dollar, are supporting a move higher by the S&P 500—towards 4050-4100+/-.

The NDR Catastrophic Sell Stop model combines time-tested, objective indicators designed to identify high risk periods for the equity market. The model deteriorated in December but remains with a fully invested equity allocation recommendation.

The sector allocation strategy continues to be influenced by the rising rate environment which will likely lead to an economic recession, resulting in more Value and defensive sector leadership. Energy, Materials, Financials, Utilities, and Health Care are overweight, while Communication Services, Consumer Discretionary, Real Estate, and Industrials are underweight.

The risk management model seeks to reduce exposure to fixed income sectors most sensitive to equity drawdowns. While the risk management model deteriorated from last month, it entered January recommending full model exposure to areas most sensitive to equity markets: U.S. High Yield, Emerging Markets, U.S. Investment Grade, and Floating Rate Notes.

We note that 2022 was a year for the record books. For example: 1) U.S. financial markets were buffeted by the most aggressive monetary tightening cycle in 40 years. 2) It was the worst year on record for the Bloomberg Barclays U.S. Aggregate Bond Index (down -13.1%). 3) Long-term U.S. Treasurys declined -29.3%. 4) It was only the sixth time since 1926 that both stocks & bonds declined same year.

Equity market volatility occurred in both directions in 2022 and I believe it will continue in 2023. Let volatility in both directions work in your favor, not against you.