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Review the latest portfolio strategy commentary from Mike Gibbs.

Over the last week, the market saw volatility pick up after approaching the upper end of what we believe is the near-term trading range. From a technical perspective, stochastics were approaching overbought territory, market breadth was narrow, and bullish momentum seemed be waning as low volatility (VIX at its lowest level since January 2022) and series of small daily moves showed some complacency in the market. Last week alone, there were three days of moves in either direction of less than 0.1%.

And, this week, the technical picture changed as volatility picked up with the S&P 500 seeing its first daily decline of over 1% since March 22 as fears within the Financial sector were renewed, which quickly shifted the focus from the near-term upside case (a break above 4,200 resistance would open the door for a move to 4,325) to at what levels is downside support (initial support at the 50-DMA of 4,033 followed by 3,963 (200-DMA).

Stochastics have quickly rolled over and are now approaching oversold territory. Given our belief that the market is likely range-bound in the near-term, we would be reluctant to spend marginal cash when the market appears overbought, but we would be accumulating favored sectors as the market moves towards oversold territory and the lower bounds of our expected trading range of 3,500-4,100.

At the sector level, Technology, particularly software, remains resilient as the YTD strength carried through to this week as relative performance continued to improve. However, there was a slight shift back towards some of the more defensive areas this week as Staples (through Wednesday’s close) were the best performing sector for the week. Overall, we believe that this bear market is likely in its later stages, and we would be reluctant to get too defensive during market pullbacks as we believe the give back in relative performance from some of the more cyclical sectors looks like an ordinary pullback. Furthermore, the back-and-forth sector shifts further solidifies our belief that equities may be range bound in the near-term and are not ready for a sustainable climb high quite yet. As economic concerns intensify, market volatility is likely to continue ahead. Overall, we expect rangebound trading in the near-term between 3,500-4,100 (+/- 100 points) range.

Q1 earnings season: Earnings season is off to a good start as 80% of companies are beating earnings on average by 7%, which is well above the average surprise of 1.2% seen during 4Q22. The stronger results have been driven by strong surprises within the Consumer Discretionary (20.7% EPS surprise), Materials (18.1%) and Industrials (8.6%) sectors with all 11 sectors seeing upside to estimates thus far. While it may still be early, we are starting to see some improvement to earnings forecasts for 2023 and 2024 versus the prevailing trend of revisions to the downside over the last year.

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