From Caution To Breakout!
Metals Mania Continues!

May 19, 2024

Weekly Market Outlook

By Donn Goodman


Welcome back readers.

Just a few weeks ago we were writing (and showing) potential caution signs occurring in the market. You may recall that in the April 7, 2024 weekly Market Outlook we posted a caution sign and presented several charts that showed the stock market might be in a correction that could get a bit nasty.

Much of the concern had (and remains) that inflation was stickier than expected and that with an elevated CPI and PPI we were likely to experience higher interest rates and no near-term Fed rate cuts.  This is a mantra that both Mish and I had been expressing since late last year.

On May 4, 2024 just 4 weeks later, we showed multiple arrows and suggested that the market had snapped back.  With three arrows, we showed the market now needed to gain some direction and wondered which way we were headed.  We were aware (and showed charts to that effect) that the market goes through 5-7% pullbacks several times each year.  However, we did not know if the April pullback was another shallow correction to an overbought market or the start of something that was far more negative.

Now we know!   With the recent breakout of the SPY, QQQ and Dow all reaching new highs (Dow 40,000), I believe we got our answer.  See the following chart of the recent breakout in the S&P 500:

It also might surprise you to know that even though the Dow just hit 40,000, a new all-time high, it has experienced 30 5% corrections since the great financial crisis of 2009.  See chart below:

As we wrote in last week’s Market Outlook, this recent earnings season has delivered better than expected corporate earnings.  If you have not yet read the article, we provide the link here.

Earnings Update.

According to FactSet, 93% of public companies have reported earnings for Q1 2024.  78% beat their earnings estimates (remember that these estimates were ratchetted down after 2023’s better than expected earnings) and 60% of those companies beat on their top line revenues.

The earnings growth rate came in around 5% versus expectations of 3.5%.  This has been a significant beat and much of the reason the markets have been able to grind higher, especially in the face of elevated interest rates, which tend to have a dampening effect on stock prices.

Earnings are expected to grow at an 8.8% yearly rate this year, according to Y Charts.  However, much of the reason the markets have had positive returns during 2023 and now 2024 is due to the over 20% growth of earnings from the 1Q of 2023 to current quarter 2024 (again according to YCharts).

Please remember it is the expectations of earnings growth that usually propels stock prices higher. Right now, much of the tailwind for the stock market remains the expectations that the Fed will cut rates and stock prices can continue to go up as lower interest rates will help sustain stock P/Es and multiples higher.

To provide a more detailed and elaborate picture of just how good earnings have been, we provide the following chart:

The positive economic mantra is that inflation is trending down and some of the accompanying recent economic indicators show a softening economy.  This has been echoed numerous times during recent earnings announcements by corporate CEOs and CFOs as they communicate a “cautious” next year forecast.  The corporate management folks are now concerned about reigning in costs more than they feel they can increase prices.  See chart below:

Investor Sentiment readings have turned positive.

Another bright spot in the readings right now is that investor sentiment has gone from headwinds just a short few months ago to now a tailwind.  According to All Star Charts below, this should help the markets sustain their recent gains.  See chart below:

Historically what happens after the S&P 500 hits a new high?

Since mid-last year we have been showing charts showing that historically if you buy the market (S&P 500) after each time it hits a new high, 6 months and 1 year later the market has been up the majority of times.

Interestingly, our core investment model (offered by subscription as well as through asset management) which uses the S&P 500 index, has been invested since early this year.  If you would like more information about that strategy or any of the other market beating models, please contact Rob Quinn at [email protected]

Below is a recent chart from Ryan Detrick of The Carson Group that shows what historically has happened after the S&P 500 hit a new all-time high.  Remember, we are also in an election year which has had a high probability of producing positive stock market returns.

If the S&P 500 finishes in May on the positive path it is currently on, what might occur?  Below we provide some interesting numbers of previous periods when May was positive after a good start to the year.

The Negative View.

We always want to present various perspectives of where the market might be headed. There are plenty of differing points of view.  Many analysts are still wondering if this rally is sustainable.

Those who voice this concern remain concerned that the economic numbers are in decline and that interest rates remain too high while the money supply is too accommodative. These points of view suggest this will only lead to inflation remaining elevated and sticky. It is interesting to note that many of the same people believe we should have another Fed rate rise and no potential cuts in the foreseeable future.

Some of the declining economic numbers include purchasing managers surveys (PMI), the ISM numbers declining, and GDP, which was barely positive for the last quarter.  Additionally, we continue to have an inverted yield curve (2 versus 10-year Treasuries) which sends red flags to economists who believe we are setting up for an imminent recession (just this week Michael Hartnett of Banc of America suggested this).

One such view is the AAII Investor Stock Allocation is flashing a caution light.

Since late March, the American Association of Individual Investors has shown a higher allocation to stocks which is one of their contrarian indicators.  Typically, when these readings get this high one year later the markets have had mediocre returns.  See chart below:

A breakout in the metals rewards the gold and silver bugs!

Since the mid-point during 2023, both Mish and I have been discussing the possibilities for the commodity super cycle and the various ways to take advantage of this cycle.  (Mish much more than me).  This included such ETFs last year as DBA (Agriculture), CANE (Sugar), Oil (USO) and then about 6 months ago or so, Gold (GLD), Silver (SLV) and gold miners (GDX).  Last week I also mentioned Silver Miners (SILJ).   

 Why our suggestions and excitement about the metals?

I believe the best way to elucidate the various reasons for this bullish move in the commodities might be best described by Mish’s interview this past week on KITCO News, as provided and edited below.   The title of the article is Stagflation fears to drive gold and silver higher, by MarketGauge’s Michele Schneider.

If you want to read the interview in its entirety, you can click on the link here.

Who is Kitco?  See the description below:

In an interview with Kitco News, Michele Schneider, Director of trading education and research at MarketGauge, said that although the Fed is reluctant to signal the start of a new easing cycle anytime soon, it is clear that interest rates aren’t going any higher. She added that this ultimately provides solid support for the precious metal.

However, Schneider said that the market’s debate on U.S. monetary policy is just a sideshow for gold, silver, and mining companies. She explained that geopolitical uncertainty supports higher inflation and weaker economic activity.

Although markets are breathing a sigh of relief after the U.S. core CPI fell to 3.6%, the first decline in six months, Schneider said that plenty of factors will still drive consumer prices higher and weigh on economic growth, creating a stagflationary environment.

“Economists are still looking at inflation in all the wrong places,” she said. "The inflation we're seeing is incredibly nuanced. This creates a challenging environment where traditional inflation indicators might not tell the whole story."

The metals are also breaking out.

The theme of many of these weekly Market Outlooks has been that when an asset class, such as the S&P 500, the Dow or semiconductors hit a new high, that tends to be a good time to purchase the asset class no matter how expensive it may appear.  Why?  Because there is NO OVERHEAD supply waiting to sell and most often investors who hold these assets are not about to take profits because they are concerned about resistance.

Such has been the case for Gold from several months ago when it broke out to new highs. We have included numerous charts over the past 3 months showing this.  Perhaps you want to go to the archives and reread the articles to see that we recommended taking a position.

This week it has been about Silver and Copper.  We provide the following charts to illustrate this more clearly:

And here is a look at copper, which has surprised many investors during 2024, but shown up in several stocks closing at new all-time highs (SCCO up 45.6% ytd, FCX up 27.4% ytd and the ETF COPX, up 37.8% ytd).  The first graph shows a shorter time period and the second chart shows a longer history of Copper from 2018.  See below:

What’s the message?

There are several factors that are unfolding for the investment theme of 2024.  It is important to note that as we make new highs, it is NOT time to get cautious but consider putting more risk capital to work.  Even better is if you are not yet following our Profit Navigator and several of the other MarketGauge models including GEMS (currently invested in metals and has been for some time now), you should get onboard.  Reach out to [email protected] and he will guide you through the myriad of investment strategy choices or reach out [email protected] or me ([email protected]) and we would be pleased to evaluate what your existing portfolio looks like and review some additions or replacements with you.

Here is the takeaway from this week’s Market Outlook:

  1. We are in a positive investment period for stocks and commodities. While the market is rotating between different sectors (Technology to Utilities as an example), there are some existing undervalued areas that remain attractive.
  2. New highs in the market indices and the metals is NOT a time to abandon these asset classes.
  3. Even though interest rates are higher than just a few years ago, they have become normalized and are expected to trend down over the next few years. That provides some wind at the back of the markets which are relying on lower interest rates.
  4. Inflation may be trending down and that is providing a positive bias towards risk assets.
  5. Companies are exceeding earnings expectations and making personnel moves to ensure that their margins can stay high.
  6. The Government is spending money like a drunken sailor ($6 trillion this past year) and that is providing excess liquidity and keeping monetary policy very loose and accommodative. This excess capital is showing up in the markets.  This is good for risk assets and especially good for commodities.  This is also why election years are mostly positive while the current administration does everything it can to keep the economy rolling.

Now we turn it over to Keith and his team who will provide the BIG VIEW bullets and the videos for this week.  Have a good upcoming week and good luck in your investing and trading.  Thank you for reading.

Donn Goodman

 

 

 

Risk On

  • Three out of the four indexes closed on all-time highs and don’t show any overbought levels on price or real motion (+)
  • All indexes were up with excellent volume patterns with only one distribution day across all four US Equity Indexes, confirming the bullish move up (+)
  • Semiconductors and technology, along with utilities, led the market higher (+)
  • Market Internals remained positive though digesting the big gains made off of the April lows, while the cumulative Advance-Decline line for theS&P500 is on multi-year highs (+)
  • New High / New Low ratio continues to improve and remains in positive territory for both the Nasdaq and the S&P (+)
  • Sentiment indicators are positive with the cash volatility plunging to multi-year lows (+)
  • Stocks above key moving averages significantly improved this week on an intermediate and longer-term basis (+)
  • Interest rates eased as inflation readings subsided with 1-3 year duration rates moving into a bullish phase (+)
  • Growth stocks improved versus value and now, on both the longer-term and short-term basis, Growth stocks are outperforming value (+)
  • With the blowup in meme stocks, retail moved back into a bull phase with biotech also improving significantly (+)
  • Foreign equities, led by emerging markets (not surprising since EEM is  commodity sensitive) are leading US equities, a positive for global equities in general (+)
  • Explosive move in copper, up over 4.6% on Friday alone, though at overbought levels on price and real motion (+)

Risk Off

  • Transportation (IYT) is the only modern family member in a warning phase, a concerning sign given its role in the economy (-)

Neutral 

  • Soft commodities backed off this week into a weak warning phase and should find support around 22.50 level in DBA (=)
  • Euro gained against the US Dollar and in a bull phase while the Dollar in a distribution phase and could break down to a bear phase on the daily charts (=)
  • Precious metals, led by silver, had an explosive week, along with Natural Gas (=)
  • Strong move in gold, closing at all-time highs (=)
  • Crude oil found support at its 200-Day Moving Average and remains in a warning phase (=)
  • Risk gauges remain neutral, partly due to the strength in gold vs the S&P (=)

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