Amazing start to the year for stocks, but there are warning signs. Measured solely by price, this is among the strongest starts to a year in the last 100 years. However, signs of at least a short-term market top are becoming obvious. Early Thursday, Birinyi Associates noted that it was the fifth strongest start to the year since 1926. S & P 500: best starts to the year (Jan. 1-Feb. 2nd, rounded off) 1934 + 15% 1987 + 14% 1975 + 12% 1976 + 12% 2023 + 9% Source: Birinyi Is a strong start to the year necessarily predictive of anything? “In seven of the ten other instances [where the S & P was up at least 7% by Feb. 2nd], the S & P continued higher for the remainder of the year,” according to Jeffrey Yale Rubin, director of research at Birinyi. One thing also stands out with exceptionally strong starts: the rest of the year tends to be volatile. In eight of the 10 years where the S & P was up at least 7% by Feb. 2nd, the S & P moved at least 10% in the remainder of the year, according to Rubin. Other signs the market is getting frothy: Short-term momentum indicators are approaching extremes. The Relative Strength Indicator (RSI), a short-term indicator of momentum for stocks and indexes, was 73 for the Nasdaq-100 and almost 70 for the S & P 500. Anything over 70 is considered overbought and suggests prices are unlikely to continue rising. It is fairly unusual for major indexes like the Nasdaq and S & P 500 to go into overbought territory. Valuations are becoming extreme: the S & P is approaching 19x forward 2023 earnings, a very rich multiple. There has also been an unusually sharp rotation: investors dumping defensive stocks for growth. High-quality defensive stocks in health care and consumer staples have been selling off (Merck, Amgen, Coke, General Mills, Campbell Soup, etc.) while tech stocks have been heavily bought (the Nasdaq-100, a barometer of tech interest, is up 17% year to date). The most beaten-up stocks have been rallying: Carvana, Bed Bath & Beyond, Coinbase, etc. along with classic speculative tech names like Robinhood, Roku, Shopify, and Twilio. Earnings at the half Today is the halfway point for earnings season. The big trend: earnings for the fourth quarter have been lower and estimates are now negative for the first and second quarter, while revenues (due largely to price increases) have remained strong: Q4 earnings Earnings: – 2.4% Revenues: + 4.6% Source: Refinitiv So far, 70% of companies have beaten estimates, but they are beating by much smaller margins: only 2.2%, versus a 5.3% beat for the last four quarters. That is a sign that analysts have not been cutting estimates enough.