Dear Clients and Other Friends,

As the 3rd quarter of the year comes to a close, it's been a challenging year. The cap-weighted S&P
500 (SPY) has gained about 13% year-to-date while the equal-weighted S&P 500 has gained
1.7%. Given the impact of the top 7 companies in the S&P 500 (not all in the same sector as will be
mentioned below), some sectors have clearly outperformed others as this chart shows:

I've included OEF, the largest 100 companies in the S&P 500, in the above list for comparison. Three
sectors, communications, technology, and consumer discretionary, along with the top 100, have
outperformed the broader index, SPY on a year-to-date basis. This makes sense since these sectors
are heavily weighted by the largest companies in the S&P 500 which had particularly strong
performance so far this year (Meta/Facebook and Google for communications, Apple, Microsoft, and
Nvidia for technology, and Amazon and Tesla for consumer discretionary). While energy has been a
solid performer throughout the year and has been outperforming the broader index since
the beginning of July, it represents less than 5% of the S&P 500 and has little effect on the broader
index.

This next chart shows how selected sectors have performed relative to the S&P 500 (SPY) over the last
3 years using 10-day moving averages. Only technology and financials have outperformed the index
during that period. Not shown but during that same period, the equal-weighted S&P 500 (RSP) also
outperformed the cap-weighted index -- by about 2.6% (although the relative gain for RSP was over
15% at the beginning of the year).
While the chart above shows performance relative to the S&P 500, this next chart shows the 10-day
moving average of absolute performance for the 5 selected sectors, all of which have been in a
recent downtrend.
Because it distorts the charts above when shown compared to other sectors, here is the 10-day moving
average of the absolute performance of the energy sector compared to that of the S&P 500 over the
last 3 years:

This next chart shows the relative performance of the value and growth stocks as categorized by State
Street Global Advisors (SPDR), SPYV, and SPYG, respectively. Interestingly, Microsoft,
Meta/Facebook, Berkshire Hathaway, Amazon, and JPMorgan Chase are currently the top 5 companies
in SPYV while Apple, Microsoft, Nvidia, Google, and Tesla are the top 5 companies in SPYG.
As shown in this relative performance chart, value stocks have outperformed both the broad index and
growth stocks over the last 3 years while growth stocks have been outperforming so far in 2023.
So, what is the immediate outlook for the Market? For the S&P 500, we are sitting at an important
line of resistance around $430 with downtrend and weak momentum. On the other hand, momentum
is coming close to a point where at least temporary reversals tend to happen (the red boxes at the
bottom of the chart).
A similar picture emerges for the NASDAQ 100 (QQQ):
And for the broader market:

Despite the declining trends and momentum shown above, the economic headwinds of a slowing
economy, relatively high interest rates, and a dysfunctional House of Representatives, I'm actually a
little optimistic for the balance of the year. First, we see that the above indexes are nearing a point
of support and possible reversal, coming close to an oversold position. This next chart shows the
percentage of stocks in each sector that are above their 50-day moving average. Only energy stocks
are above 50% and the remaining sectors are all below 33%. There's room to grow.
Finally, as I write this, Congress has approved and President Biden has signed a 45-day continuing
resolution with near unanimous support from Democrats in the House and Senate but that may
threaten McCarthy's speakership from hard-right Republicans (Matt Gaetz has signaled that he will file
a motion to remove McCarthy this week). The CR maintains funding at current levels in accordance
with the debt ceiling agreement signed earlier this year (to the dismay of the House Freedom Caucus)
and contains disaster relief money, but no new money for Ukraine or the border. We will see soon
whether the avoidance of a government shutdown (or, at least a 45-day deferral) will reverse the
current trend.

Given McCarthy's capitulation on the CR, if he survives removal, I expect the House and Senate will
reach some kind of compromise on the budget by the time the CR runs out. As Biden's budget is
looking for an $800 billion deficit reduction over the 10-year budget window (according to the CBO)
while the House Republicans are looking for draconian cuts that would decimate almost all
discretionary spending (also according to the CBO), there is some room for compromise.

Technical analysis tells us where the market has been and how it might proceed from here. It tells us
how investors are behaving and are likely (but not guaranteed) to behave going forward. While the
current trends are negative, we are also reaching a point of potential reversal as has been the case in
the past (past performance is no guarantee of future results). At this point, there are few areas
showing positive absolute performance. After the initial reaction to the passage of the CR, I believe
the next week may give us a good indication of market direction until something comes along to
change investor expectations.

My preference is to seek out and hold a diversified portfolio of individual stocks and ETFs with
continuing positive trend and momentum. I also like to keep in mind the heavy influence of very few
companies on the performance of the S&P 500 and most of the individual sectors and other cap-
weighted funds. Substantial outperformance is highly unlikely in a diversified portfolio. While
technical analysis drives my trading decisions, not to be ignored are the macroeconomic and the
political and geopolitical factors that contribute to the aggregated thinking of investors reflected in
market performance.

I hope you find this update interesting and won’t hesitate to let me know if you have any
questions. Remember, past performance is no guarantee of future performance.

All best,

Ed.

p.s. Please let me know if you do not wish to receive these updates in the future.
* I use exchange-traded funds ETFs to illustrate market performance on an investible basis. SPY
reflects the total return of the S&P 500 (that is, inclusive of reinvested dividends). Many indexes,
including the S&P 500, are provided without the impact of reinvested dividends. For the S&P 500, the
impact of dividends has averaged about 2.8% per year over the last 5 years. This makes a benchmark
comparison based on the S&P 500 index rather than the total return SPY favorable to the investment
manager that uses the index as a benchmark.