Ever since the S&P 500 bottomed in late October/ early November 2023, the 21-day exponential moving average (EMA) has served a major “trend line.” Put simply, whenever stocks fell to test this line, they “bounced” soon after and the rally continued.
Last week’s price action featured a different dynamic. Stocks fell to test the 21-EMA and struggled to reclaim it for two sessions (blue oval in the chart below). The only other time this happened was during the brief market pullback in early January 2024. At that time, the market rebounded sharply on the third trading session (purple oval in the chart below).
In this context, today’s price action is key. If the S&P 500 rallies hard and reclaims the 21-EMA, then it’s likely stocks will rally to new highs. However, if stocks cannot reclaim the 21-EMA with conviction today, then we’re likely to see more downside for stocks.
I’ve illustrated the S&P 500’s support lines in the chart below.
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We’re picking up where we left off our A Deep Dive Into What AI Means For Corporate America investment series. If you missed the first two parts from this series, you can access them hereandhere.
By brief way of review:
Artificial Intelligence (AI) is the dominant theme in the investing world today.
Currently AI is capable of accessing vast swathes of available information and integrating it in such a way that AI appears to be creating something from scratch.
Current AI models are being deployed in practically every sector of the economy from entertainment to marketing, operations and more.
While the areas of the economy that AI is impacting are different, the implications are all the same:
Improving productivity (getting more results for less effort).
This is why AI is so exciting for the economy and investors. In a best-case scenario, AI will lead to a massive increase in profitability as revenues grow and costs decrease. And that is what has triggered a kind of mania for AI-related stocks.
The flipside of this is that AI is currently a kind of Wild West in which “anything goes.” There are no legal, legislative, or societal frameworks for this technology. As a result, advances are being made with few if any ethical considerations.
In this sense, AI is following a pattern we’ve seen with other technological revolutions in the past. That pattern consists of two phases is:
The initial breakthrough phase, which occurs before social/legal frameworks are in place.
The “normalization” phase during which social/legal frameworks are implemented, giving the technology a societal and financial legitimacy.
If you need a real-world example of this, think of the electronic music file or MP3 revolution.
The first phase was Napster in 1999, which featured the sharing of music in what was later deemed as illegal activity (the legal framework was not yet ready for the technology). During this initial phase Napster exploded in popularity particularly among young people. At its peak Napster had tens of millions of users. Then came the lawsuits, Napster went bankrupt, and social/ legal frameworks were introduced for this new technology. During this time Apple introduced iTunes: a version of MP3 technology in which MP3s could be bought and sold in a legally acceptable form.
Napster is still around. Its marketing promotes the fact it is “100% legal.” And it has about five million users. By way of contrast, at its peak, iTunes had 500+ million users and accounted for 63% of all digital music sales. It is now in the process of being converted over to Apple Music, a new service that also offers music streaming and other services in order to compete with Spotify which is the new market leader. So once again, the technology has changed and requires adaption.
AI as it stands today, is in its “Napster” phase. As investors we can profit from this by riding key players in the space, but we need to do so with our eyes open to risks, in particular the risk that at some point, the threat of a regulatory framework for AI will appear. And when it does, much of the “froth” in AI stocks will disappear as hot money/ momentum investors leave the space out of fear.
This doesn’t mean that AI will be “dead” at that time. Indeed, the BIG money will be made as market leaders emerge from the ashes of that collapse.
We’ll delve deeper into this in tomorrow’s article…
In the meantime, if you’re interested in profiting from this technological revolution, we are currently putting the finishing touches on a special investment reporting that outlines some of the larger implications for AI as well as several of the most likely market leaders.
To receive this special report when it’s published later this week, all you need to do is sign up for our FREE daily investment commentary Gains Pains & Capital.
We’re picking up where we left off our A Deep Dive Into What AI Means For Corporate America investment series. If you missed the first part from this series last week, you can access it here.
By brief way of review:
Artificial Intelligence (AI) is the dominant theme in the investing world today.
Currently AI is capable of accessing vast swathes of available information and integrating it in such a way that AI appears to be creating something from scratch.
We’ve already detailed the impact this technology will have on the entertainment industry: creating videos/ movies/ commercials used to require dozens of people (directors, actors, lighting technicians, sound technicians, editors, etc.) Courtesy of AI, ONE person can serve all of those functions.
Today, we’re going to assess the impact AI can have on other industries.
In the corporate world, AI can perform many tasks that previously required several people if not entire departments. AI can write an entire marketing piece and even create a visual advertisement for a product using a few words/ phrases entered by one user.
Interactive Investor recently used to AI to develop an entire online marketing campaign including thousands of ads and keywords. The results saw an increase in account creation and decrease in acquisition costs.
AI can do legal work as well, performing document review, analyzing contracts, and even preparing a deposition. There are now several examples of AI “legal assistants” located online.
AI can even alter business operations. Whole Foods has begun introducing “Just Walk Out” stores in which you simply walk in, take whatever you want from the shelves, and walk out. Sensors and cameras take care of the payment side of things.
The above examples of AI technology pertain to very different areas of the economy: making movies, performing legal diligence, shopping for groceries, etc. However, for investors, the implications of AI all boil down to just two items:
Improving productivity (getting more results for less effort).
This is why AI is so exciting for the economy and investors. In a best-case scenario, AI will lead to a massive increase in profitability as revenues grow and costs decrease. And that is what has triggered a kind of mania for AI-related stocks: Nvidia, Super Micro Computers, etc.
The flipside of this is that AI is currently a kind of Wild West in which “anything goes.” There are no legal, legislative, or societal frameworks for this technology. As a result, advances are being made with few if any ethical considerations.
We’ll be assessing those in tomorrow’s article.
In the meantime, if you’re interested in profiting from this technological revolution, we are currently putting the finishing touches on a special investment reporting that outlines some of the larger implications for AI as well as several of the most likely market leaders.
To receive this special report when it’s published later this week, all you need to do is sign up for our FREE daily investment commentary Gains Pains & Capital.
I’m about to share the single most important thing about investing in Artificial Intelligence (AI) today…
If you keep this in mind, you’ll avoid the basic mistake that 99% of investors are making when they put capital to work in AI.
Are you ready? Here it comes…
Over 99% of commentators have no idea what they’re talking about.
I’m not trying to be rude, nor facetious. There are plenty of brilliant, insightful people commenting about AI today. But investors often act as if strategists and analysts are psychic.
They’re not.
Human innovation is too messy, chaotic, and ever-changing for lots of people to accurately predict. This is especially true when it comes to technological revolutions with far-reaching implications.
If you don’t believe me, let’s consider what happened with search engines, one of the recent technological revolutions that produced incredible profits for investors who played it correctly.
Today, Alphabet (GOOGL) is THE search engine of the world, accounting for over 90% of global searches. At a market cap of $1.7 TRILLION company, it is one of the 10 largest companies in the world. It routinely produces tens of billions of dollars in profits. In fact, its 2023 profits were greater than the market capitalizations of Ford (F) and U.S. Steel (X) combined.
However, back in the 1990s when search engine technology first came to market, Alphabet (then Google) wasn’t a market leader. Rather, the company was competing for market share with numerous other firms including Yahoo!, Hot Bot, Excite, Ask Jeeves, AltaVista, AOL Search, MSN Search and others.
Indeed, at that time, Yahoo! was the largest search engine company with a market capitalization of $125 billion. In fact, Yahoo! had a chance to buy the Alphabet for just $1 billion in 2002! Fast forward to 2017, and Yahoo! was sold to Verizon for less than $5 billion… by which point Alphabet was a $730 billion company.
Who saw that coming?
My point here is that, the internet, specifically search engines, represented an incredible revolution that changed the world. However, few if any people were able to accurately predict how it would play out.
And this didn’t just concern picking winners vs. losers… it also concerned the technology as a whole: many investors thought that the Tech Crash of the early ’00s meant that the opportunity for profiting from search engines was over. They couldn’t have been more wrong as the below chart illustrates.
The great news is that those who were able to navigate the markets to profit from search engines made truly STAGGERING amounts of money. And if you could pick the future market leaders in advance… while riding the booms and busts with proper risk management… well, the above chart of Alphabet shows you the kind of returns you could generate.
Thus, the key for investing in AI today is determining who the future leaders will be. That’s where the REAL money will be made.
We are currently putting the finishing touches on a special investment reporting that outlines some of the larger implications for AI as well as several of the most likely market leaders.
To receive this special report when it’s published, all you need to do is sign up for our FREE daily investment commentary Gains Pains & Capital.
Yesterday, I outlined how the Fed and the Treasury are actively working to juice the financial system to aid the Biden administration’s re-election bid.
By quick way of review:
1) The Fed will soon begin cutting interest rates while stocks are at all time highs, the economy is still growing, and financial conditions are in fact looser than they were before the Fed raised rates for the first time in March 2022.
2) The U.S. is running emergency levels of social spending at a time when the economy is still growing. It’s added $5 trillion in debt since President Biden took office. And the pace of debt issuance is speeding up, not slowing down: the U.S. has added $2 trillion in debt in the last 12 months alone. You can thank Treasury Secretary Janet Yellen for signing off on this insanity.
Today, I’d like to delve a bit more into one of the more nefarious schemes the Fed is using to juice stocks higher. To fully grasp this, we need to wind the clock back to March 2023, when the U.S. regional banking system was on the verge of collapse.
At that time, a number of large regional banks collapsed due to:
1) Bad risk management: their leadership teams failed to appropriately hedge their interest rate risk while the Fed was raising rates.
2) Banks were only paying 0.1% on deposits, while money market funds and short-term Treasuries were yielding 4% or more. As a result of this, depositors were pulling funds out of the banks, resulting in the banks having to sell large portions of their loan portfolios at a loss (banks must maintain certain capital requirements based on deposits).
The Fed took action to stop a crisis from unfolding, pumping $400 billion in liquidity into the financial system in just three weeks. Prior to that, the Fed’s balance sheet was falling due to its Quantitative Tightening (QT) program. The Fed reversed NINE months worth of that program in just three weeks!
That staved off a crisis from hitting. But the Fed then began a back-door bailout of the banks through which it gave them additional access to credit and liquidity. And not just a little… but a LOT.
The below chart shows this facility’s use running back to 2005. And no, you’re not imagining things: the Fed’s use of this facility to juice the financial system in 2023 was greater than what it did during the pandemic, and almost as great as that used during the Great Financial Crisis of 2008! In fact, today it’s higher than it was during the absolute depth of the pandemic in March 2020!
We’re now almost a year out from the regional banking issues and the Fed continues using this facility to the tune of over $200 BILLION. So again, the Fed is juicing the financial system for political purposes. It’s abhorrent and corrupt, but it’s reality. And well prepared investors can take steps to insure they profit from what’s happening with the right investments.
I’ll address how to profit from this in tomorrow’s article. If you’d like it delivered to your inbox, all you have to do is join our FREE daily investment commentary GAINS PAINS & CAPITAL.
Having juiced the markets higher with the promises of rates cuts, the Fed now finds itself in the absurd position of walking back these promises as A) stocks are at all time highs, B) the BLS continues to release manipulated jobs data to aid the Biden administration and C) the economy is allegedly growing at annualized rate of 4%+.
Regarding the jobs data…
It has become a running joke that the beancounters in Washington DC release absurdly positive economic data to aid the Biden administration, only to revise the data downward multiple times after the fact. Perhaps the single most ridiculous example of this occurred in 2022 when the Philadelphia Fed revealed that the BLS had overstated job growth in first half of the year by one million jobs.
I bring this up because the BLS was up to its usual shenanigans with the January jobs report released on Friday. In it the BLS claimed that the economy added 353,000 jobs in January 2024 instead of the expected 185,000. Let’s be blunt here, if the economy was even close to as strong as the gimmicked data the BLS issues, the Biden administration’s approval ratings wouldn’t be in the toilet.
Politics aside, the issue with this jobs report is that it makes it impossible for the Fed to cut rates any time soon. After all, how can the Fed start easing monetary conditions when the economy is supposedly adding over 300,000 jobs per month and GDP is supposedly growing at 4.2%?!
And so the markets are in a kind of limbo. Everyone is bullish based on hopes of Fed rate cuts… but the Fed can’t cut rates with the data this strong. This opens the door to a market correction to take some of the “froth” out of stocks.
The S&P 500 hasn’t touched its 50-day moving average (DMA) in three months. The 50-DMA is represented by the blue line in the chart below. As you can see, it’s unusual for the S&P 500 NOT to touch this line for such a long period of time.
I would also add that the S&P 500 is ~5% above the 50-DMA. Historically, this degree of extension has market a top of sorts.
With all of this in mind, the odds favor a correction to the 50-DMA (upper 4700s) some time in the next few weeks. After that, we’ll revisit our market forecast to see what’s next.
As I keep stating, you CAN outperform the overall market, but it takes a lot of work and insight!
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The most critical companies to monitor are the MAG 7/ big tech plays. These are the largest companies in the S&P 500. Because of their size, they account for ~30% of the index’s weight.
Thus far, Tesla (TSLA), Microsoft (MSFT), and Alphabet (GOOGL) have reported. The results have been interesting.
TSLA reported on 1/24/24. The stock was down 10% on its results.
Last night, MSFT and GOOGL reported. MSFT is down about 0.5% while GOOGL is down over 5%.
So, thus far two of the three MAG 7 have seen their stocks collapse a LOT on earnings results while one of is effectively flat.
This doesn’t bode well for the broader market. It is VERY difficult for the S&P 500 to rally much at all if the MAG 7 plays are weak. Remember, these companies account for 30% of the market’s weight.
Apple (AAPL), Amazon (AMZN) and Meta (META) report on Thursday. Nvidia (NVDA) reports on 2/21/24. If AAPL and META also sell-off on their results, it’s safe to assume the market will experience a decent correction.
From a technical analysis perspective, the S&P 500 has support just below 4,800. After that is CRITICAL support at 4,595. Given how the MAG 7 plays are responding to earnings, I wouldn’t be surprised to see a correction to 4,595 in the next two months.
This would represent a back-test of the Cup and Handle formation I showed yesterday. Bear in mind, a correction like this would NOT negate our longer term forecast for the S&P 500 to go to 6,000 before 2025. Rather, this correction is a short-term development and would present a fantastic buying opportunity.
If you’re looking for someone to guide your investing to insure you crush the market, you can sign up for our FREE daily market commentary, GAINS PAINS & CAPITAL.
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The S&P 500 is up nearly 150 points in just five sessions. This has been quite a move. And what’s truly extraordinary is that every intraday dip is being bought aggressively.
However, a word of caution here.
The S&P 500 is now 4% above its 50-Day Moving Average (DMA) and 9.8% above its 200-DMA. Over these last 18 months, any time the index has become this extended above its trend has resulted in a short term peak. So, it wouldn’t be surprising to see the S&P 500 correct down to back-test the recent breakout at 4,790.
After that, the door is open to 5,000 on the S&P 500. The Cup and Handle formation I outlined a few weeks ago has broken to the upside. Long-term (later in 2024) we are likely going MUCH higher.
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On November 28th, 2023, I predicted that stocks would hit new all-time highs before February 1, 2024.
Bear in mind, the S&P 500 was at 4,550 when I wrote this. So my prediction meant that the index would have to rally to over 4,818 (the former all-time high established January 3, 2022) in eight weeks’ time.
On Friday this happened, a full two weeks ahead of schedule. Anyone who followed our prediction made a killing!
So what happens now?
Stocks are now quite stretched to the upside. I anticipate we’ll see a drop to backtest this recent breakout at 4,800 sometime in the next 10 days. But after that, the door is open to a run to 4,920 by the end of 1Q24. That’s the upside target for the inverse Head and Shoulders pattern the S&P 500 has established in the last four weeks.
So, in the last seven months, we’ve predicted:
1) The S&P 500 to decline to 4,100s (when it was at 4,500).
2) The S&P 500 to rally from the 4,100s to 4,600 (when it was at 4,200).
3) The S&P 500 to hit new all-time highs before February 1st 2024(when it was at 4,550).
As I keep stating, you CAN outperform the overall market, but it takes a lot of work and insight!
If you’re looking for someone to guide your investing to insure you crush the market, you can sign up for our FREE daily market commentary, GAINS PAINS & CAPITAL.
As an added bonus, I’ll throw in a special report Billionaire’s “Green Gold” concerning a unique “off the radar” investment that could EXPLODE higher in the coming months. It details the actions of a family of billionaires who literally made their fortunes investing in inflationary assets. And they just became involved in a mid-cap company that has the potential to TRIPLE in value in the coming months.
On December 20th 2023, I predicted that stocks would hit new all-time highs before February 2024. Despite all the drama in Washington as well as the geopolitical risk in the world, stocks are within spitting distance of doing this… and we’re only halfway through January.
The S&P 500 bounced hard off of support at 4,700. If the index closes this week even marginally higher, it will be at new all-time highs.
This is not our first accurate prediction for stocks.
Throughout September and October of 2023, we warned clients that the S&P 500 was due for a pull back down to the 4,100s. Time and again, we warned our readers not to buy into the rally and to preserve their capital for an incredible buying opportunity that would soon hit.
And hit it did! And our readers “backed up the truck.”
Then, on November 2, when the S&P 500 was still at 4,200, we told clients to buy aggressively because the S&P 500 was going to 4,600 before year end. Remember, the S&P 500 had only just bottomed at 4,100 and we were predicting a 400 point move to hit in the span of eight weeks. So this was an EXTREMELY aggressive forecast. But our research backed it up and we trust our work!
The market then rallied to 4,600 in just four weeks! Those clients who followed our recommendation and loaded up on stocks at 4,100 made an absolute killing!
So, in the last seven months, we’ve predicted:
1) The S&P 500 to decline to 4,100s (when it was at 4,500).
2) The S&P 500 to rally from the 4,100s to 4,600 (when it was at 4,200).
3) The S&P 500 to hit new all-time highs before February (when it was at 4,600).
As I keep stating, you CAN outperform the overall market, but it takes a lot of work and insight!
If you’re looking for someone to guide your investing to insure you crush the market, you can sign up for our FREE daily market commentary, GAINS PAINS & CAPITAL.
As an added bonus, I’ll throw in a special report Billionaire’s “Green Gold” concerning a unique “off the radar” investment that could EXPLODE higher in the coming months. It details the actions of a family of billionaires who literally made their fortunes investing in inflationary assets. And they just became involved in a mid-cap company that has the potential to TRIPLE in value in the coming months.
As I keep telling you, it IS possible to time the market. The key is to put in the work to do so.
For me, one of the best means of predicting stock market moves is to focus on “market leading” indicators, or assets that typically lead stocks to the upside and the downside during market turns.
One of my favorite such indicators is high yield credit, or junk bonds.
Bonds/ credit are senior to stockholders. If a company goes bust and needs to liquidate its assets, bond/ credit holders will be paid out long before stockholders see a dime. And generally speaking, bond investing is more sophisticated than stock investing largely due to bonds’ greater sensitivity to Fed policy, the economy, and more.
As a result of this, credit, particularly high yield credit, or credit for companies that are at a greater risk of going bust, typically leads stocks when it comes to pricing future risk on or risk off moves.
You can see this clearly in the following charts which depict the High Yield Corporate Bond ETF (red line) and the S&P 500 (black line). Sometimes the two assets move in tandem, but other times, credit leads stocks clearly to the point that you can accurately predict the next market move for stocks.
The first chart concerns the risk on move in assets that occurred from late 2022/ early 2023. At that time, HYG lead the market to the upside, rallying aggressively even when stocks would dip for a day or two. I’ve illustrated this with a purple rectangle below. Throughout that time period, the ongoing strength in HYG was a reliable indicator that the stock market would continue to rally.
Another example concerns the risk off move in assets that occurred from July 2023 through November 2023. During that period, high yield credit failed to confirm any rally in stocks, with the red line (credit) rolling over quickly even when the black line (stocks) bounced aggressively. I’ve illustrated this with a blue rectangle in the chart below.
So, what is high yield credit telling us about the future of the stock market today?
HYG is leading stocks to the downside, though it is doing so in a very controlled manner. Right now, HYG is suggesting that the S&P 500 will drop to 4,700 or so. Obviously this can change as things develop, but for now, HYG is telling us that any stock pullback should be relatively shallow.
As I keep stating, you CAN outperform the overall market, but it takes a lot of work and insight!
If you’re looking for someone to guide your investing to insure you crush the market, you can sign up for our FREE daily market commentary, GAINS PAINS & CAPITAL.
As an added bonus, I’ll throw in a special report Billionaire’s “Green Gold” concerning a unique “off the radar” investment that could EXPLODE higher in the coming months. It details the actions of a family of billionaires who literally made their fortunes investing in inflationary assets. And they just became involved in a mid-cap company that has the potential to TRIPLE in value in the coming months.
The S&P 500 is ~5% above its 50-Day Moving Average. Historically, this degree of extension above the primary trend has marked a temporary top. It doesn’t mean that stocks will collapse, rather is suggests the upside is limited and consolidation/ correction is the high probability scenario.
The question now is how deep the correction will be…
For that analysis we turn to bonds and the Fed.
The yield on the 2-Year U.S. Treasury has declined from 5.25% to 4.2% where it is now. This decline has been driven by the Fed pivot, in that the Fed will no longer be raising rates, but instead will begin cutting them in the near future.
This will be a boon for stocks as this declining yield means:
1) Stocks will be priced at a higher future Earnings Per Share (EPS) multiple.
2) Money will begin to flow out of bonds and money market accounts into stocks as yields have peaked.
All of the above suggests that any and all dips in stocks will be relatively shallow. Put simply the coming decline is an opportunity to “buy the dip” in a new bull market.
In terms of specific price points, the S&P 500 has major support at 4,700. I would be very surprised to see the market drop much below that level. The S&P 500 might decline into the upper 4,600s to “run the stops” for stock bulls, but a drop below 4,680 is unlikely.
For more market insights and analysis, join our free daily market commentary Gains Pains & Capital. You’ll immediately start receiving our Chief Market Strategist Graham Summers, MBA’s briefings to your inbox every morning before the market’s open.
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On Monday I told you that the S&P 500 was headed for 4,700. At that time, the market was hovering around 4,600. And given all the risks in the world (turmoil in the Middle East, slowing economic data in the U.S.), I’m sure many people thought I was bonkers to predict that stocks would continue higher.
Fast forward 48 hours and it looks as if the S&P 500 will hit my target before the week ends. As I write this, the S&P 500 futures are at 4,656.
The gains won’t stop there either. I believe the market will reach new all-time highs before February 1 2024. The former high was 4,818 set in October of 2022. I believe we’ll break that within six weeks’ time.
The long-term chart is clear… I’ll tell you what it portends tomorrow. But for now, here’s a hint.
As I keep stating, you CAN outperform the overall market, but it takes a lot of work and insight!
If you’re looking for someone to guide your investing to insure you crush the market, I’m your guy. Since 2015, subscribers of my Private Wealth Advisory have maintained a win rate of 74%.
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Throughout this time, we completely OBLITERATED the S&P 500, returning over 200% compared the market’s 125%.
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The S&P 500 has been trading in a 40-point range since mid-November. I know that sounds difficult to believe, but it’s true. For all the issues in the world (conflict in the Middle East, the ongoing war between Russia and Ukraine, economic data weakening in the U.S., political issues/ potential impeachment for the Biden administration), the stock market has gone nowhere.
See for yourself. I’ve illustrated this with a blue rectangle in the chart below.
Having said that, the market DID reveal something MAJOR in the last month… but it’s what DIDN’T happen as opposed to what happened.
What didn’t happen?
Stocks didn’t break down.
In spite of all the issues and potential risks in the world right now, the bears couldn’t generate enough selling pressure to push stocks down more than 1%. And considering the market was EXTREMELY overbought going into this period, it REALLY suggests the bears are weak right now.
Which means…
The Santa rally is about to hit. Indeed, just last week, the market managed to break out of its trading range and stay there. I’ve illustrated this development with a purple circle in the chart below.
If stocks hold this today, then the door opens to a Santa rally that sees the S&P 500 hit 4,700 before year-end. Take out 4,600 on a weekly basis and you’ve got an opening to 100 points higher relatively quickly.
For more market insights and analysis, join our free daily market commentary Gains Pains & Capital. You’ll immediately start receiving our Chief Market Strategist Graham Summers, MBA’s briefings to your inbox every morning before the market’s open.
And if you sign up today, you’ll also receive a special investment report How to Time a Market Bottomthat the market set-up that has caught the bottoms after the Tech Crash, Housing Bust, and even the 2020 pandemic lows.Even more importantly, you’ll find out what this trigger says about the market today!This report usually costs $249, but if you join Gains Pains & Capital today, you’ll receive your copy for FREE. To do so…
Yesterday’s market action could not have illustrated the current market rotation any better.
As I recently outlined:
1) The S&P 500 is currently consolidating after one of its best monthly performances in 30 years.
2) This consolidation has consisted of large tech correcting while laggard sectors and indices (small caps/ the Russell 2000, industrials/ the Dow Jones Industrial Average) catch a bid.
Yesterday’s price action illustrated this perfectly: microcaps (the Russell 2000) caught a major bid relative to tech (the NASDAQ) as the Russell 2000 ROSE over 1% while the NASDAQ fell nearly 0.9%.
If you heeded yesterday’s missive you did quite well! Again, you CAN outperform the overall market, but it takes a lot of work and insight!
This trend is likely to play out over the next two weeks until the Russell 2000/ NASDAQ ratio reaches its 200-day moving average (DMA) sometime around the Fed’s next FOMC (December 12th-13th).
At that point the overall market should complete its consolidation/ correction and begin its next leg up. I’ve said previously that the S&P 500 will hit 5,000 sometime in the 1Q24. The setup is clear in the longer-term Cup and Handle formation.
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The S&P 500’s performance for the month of November 2023 was one of the best single month performances for stocks in the last 30 years. Stocks finished the month up 9.5%, a truly incredible return.
The big question is “what’s next for the markets?”
The answer is “rotation.”
Tech led the rally as Big Tech blasted higher throughout November while much of the rest of the market lagged behind. We are now seeing capital flowing into some of of the laggards, specifically small caps.
The ratio between the NASDAQ and the Russell 2000 has been in a downtrend for most of 2023 as Tech stocks outperform small caps. We are now seeing a break of this downtrend to the upside as small caps finally catch a bid and Tech consolidates
This rotation is allowing overall breadth to improve as non-Tech stocks catch up to Tech leaders. You can see this clearly in the chart below in which breadth (red line) is catching up to the Tech sector (XLK).
After this rotation/ catch up is finished, stocks go to new all time highs. The Cup and Handle formation in the long-term chart for the S&P 500 is clear.
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The S&P 500 is consolidating after one of its best monthly performances in the last 30 years.
Thus far in November, the S&P 500 is up 8.5%. If the month ended today, it would be one of the top 10 monthly returns for the S&P 500 in the last 30 years. We rode this rally the entire way up, having told our clients to buy stocks aggressively when the S&P 500 was down at 4,200. Suffice to say, they’re quite happy.
And their #1 question today is: so what’s next for stocks?
The S&P 500 is quite overextended, having rallied to a level that is 4% above its 50-day moving average (DMA). Throughout the last 12 months, an extension of this magnitude above the 50-DMA has marked a temporary top for stocks.
The big question now is if stocks correct… or if they simply consolidate here, thereby allowing the 50-DMA to catch up to price, before the market make its next push higher.
Thus far the market is opting for #2: consolidating.
The S&P 500 has traded within a 20 point range since November 22nd. The key issue here as far as I’m concerned is that the bears have failed to push stocks down in any significant way, even though there was very low trading volume due to the Thanksgiving holiday.
Think of it this way… stocks are finalizing one of their most aggressive single month rallies in 30 years, and the bears can’t even generate enough selling pressure to push the S&P 500 down 1%.
This suggests that the next move for stocks will be up once this consolidation is over. And given that the market is less than 5% from its all-time highs, I believe we’ll see the S&P 500 hit NEW all-time highs some time in the first quarter of 2025, likely before February 1st, 2024.
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It is widely believed that you cannot time the market. This is a myth. You can time the market, but it takes a lot of work and knowledge.
Case in point, as I outlined in yesterday’s article, I accurately called for the S&P 500 to run to 4,600 back on November 2, 2023 when the market was still just at 4,200.
The S&P 500 hit a high an intraday high of 4,557 yesterday. Modesty aside, this was an incredible call, made within a few days of the market hitting its absolute lows before the rally.
This wasn’t luck either.
Prior to this call, I had been warning clients for weeks that stocks would break down to the 4,100s on the S&P 500 and that this would be a MAJOR buying opportunity. Heck, the literal title to a research note to private clients on October 5th was “Bonds Stabilize… But I Expect a Final Flush for Stocks.”
What happened next is illustrated in the chart chart. Again, I called for the S&P 500 to drop to the 4,100s weeks in advance, then predicted the S&P 500 would run to 4,600 weeks within days of the market bottom in late October.
So my point remains the same: you CAN time the market, but it takes a lot of work and knowledge.
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The following are excerpts from my Private Wealth Advisory market update to private clients written on 11-2-23. At that time the S&P 500 was trading in the 4,200s. It’s at 4,531 today.
The door is open to a Santa Rally to 4,600 or even higher on the S&P 500.
Why?
The Treasury just removed the single largest concern for stocks for the remainder of the year.
As I’ve noted previously, one of the most difficult aspects of stock market investing is that the market is a discounting mechanism for millions, if not billions, of pieces of information. The stock market represents the collective decisions of millions of individuals all of whom are thinking about a myriad of data points/ issues… and all of whom have literal money on the line.
However, out of all the millions or billions of pieces of information that the market is discounting at any given time, it typically only really cares about two or three issues at a time.
Sometimes it’s inflation. Other times it’s what the President is doing (or tweeting). Other times it’s China. Other times it’s what the Fed is doing or about to do. Other times it’s the economy. And so on and so forth.
What makes things even more difficult is the fact that the market changes its focus all the time. It might be really focused on inflation for a few weeks only to then ignore inflation for months on end. Similarly, the market might go weeks without acknowledging anything Fed officials say, only to then care a great deal about a single statement made by a single Fed official during an hour-long Q&A session.
I bring all of this up, because since late-July/ early-August 2023, the #1 thing the market has cared about has been the size of the Treasury’s long-duration debt issuance…
On July 31st 2023, the Treasury announced its financing needs for the third quarter (July through September). The Treasury announced it would:
1) Need to borrow $274 billion more than previously expected.
2) Increase its issuance of longer duration Treasury bonds for the first time since 2021.
Regarding #2, the actual increase in dollar terms of long duration bonds that the Treasury needed to issue was relatively small ($102 billion vs. $96 billion). However, the fact that there was increase in long duration issuance, combined with the increase in total debt issuance ($274 billion) was a surprise.
And the bond markets HATE surprises.
Since that time, bond investors have been dumping ALL long duration bonds. This has resulted in long-term Treasury yields rising (bond yields rise when bond prices fall). And because the stock market is priced based on long-duration Treasury yields, this has meant a sell-off in stocks.
The chart bel shows the yield on the 10-Year U.S. Treasury and the S&P 500 from the last QRA announcement on July 31st 2023 until last week. As you can see, the two items have been moving in lockstep.
Which brings us to this week (week of 10-30-23).
On Monday the 30th of October, the Treasury issued its QRA for the fourth quarter of 2023. It surprised the markets (in a good way) by stating that it would borrow only $776 billion (this was $76 billion less than previously expected).
Then, on Wednesday (11-1-3), the Treasury released its Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee.
In it, the Treasury Borrowing Advisory Committee wrote the following (emphasis added)
The Committee supported meaningful deviation from the historical recommendation for 15-20% T-Bill share.While most members supported a return to within the recommended band over time, the Committee noted that the work Treasury has done to meaningfully increase WAM over the past 15 years affords them increased flexibility with T-Bill share in the medium term.
Source: Treasury.gov
As I explained to clients in the remainder of this market update, the decision of the Treasury to rely extensively on short-term T-bills to finance the deficit would ignite a “risk on” rally that will likely last into year-end.
Since that time, the S&P 500 has done this:
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Try as they might, the bears simply couldn’t get it done last week.
The S&P 500 spent a few days chopping around its 200-day moving average (DMA) before spiking higher on Friday. Much of this late week rally was short covering, but the fact remains that sellers simply didn’t have what it took to push stocks any lower.
Indeed, the biggest news as far as stocks were concerned was the fact that the tech-heavy NASDAQ simply refused to take out support at 13,000.
Tech is a long-duration sector of the market… meaning it is heavily influenced by long duration bonds. The reason for this is that your typical tech start-up will take years before it brings a product or service to market and starts generating cash flow. So when you’re modeling a tech company’s future cash flows, you need to be thinking five years out or more. This means comparing a tech company’s future earnings against what you’d earn from owning a risk-free U.S. Treasury over the same time period.
Simply put, the tech sector is heavily influenced by what long-duration bonds do… which is why it’s truly astonishing that the NASDAQ has refused to break down despite the fact the yield on the 10-year U.S. Treasury spiked to new highs. The fact that stock market bears failed to crush tech is really quite bullish and a significant “tell” for the markets.
With all of this in mind, it’s quite possible stocks bottomed last week or will bottom this one. I remain concerned about a number of risks to the markets, but we have to respect price action. And price action tells us that stocks are strong in spite of many issues.
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