The Door is Open. Time for the Fed to Act.
How Much?

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Happy to have you back with us.  We hope that you had a good week in the markets as we watched most of our models outperform during this snapback rally.

The Door is Open.

Investors have been anxiously waiting for the Fed to “take action” and reverse the interest rate tightening they began in early 2022.  This past week new “data” came out showing a continued decline in wholesale and consumer prices.

With the CPI trending down and heading in the right direction, most economists and investors are optimistic that the door is wide open for the Fed to lower rates.  Economists, analysts and investors are all waiting for Fed Chairman, Jerome Powell and his merry group of Fed Governors who vote (this week Wednesday), to begin to reduce the restrictive borrowing costs.

There are plenty of intelligent guesses as to how much the Fed may reduce rates.  Most estimates are for a 25-basis point reduction although there are plenty of people who feel that rates have remained so high, the economy could use a 50-basis point reduction to start things off.

We had our own opinion and shared it with readers last week.  We reviewed several potential scenarios last week, and if you have not yet had an opportunity to review (or wish to reread the column), this link will take you there.

Whatever the Fed decides, we do not think that “doing nothing” is a productive solution.  Yes, inflation remains sticky and elevated, but with a 200 to 250-basis point spread between the Fed borrowing rates and the rate of inflation (trending down), they MUST do something!

One last point about this.   Many forecasts are predicting a 125-150 (1.25-1.50%) basis point reduction in the Fed Fund rates by year-end 2024.  We think that this is an overly aggressive estimation of what might occur.  We would be in the camp that MAYBE we will see 75-100 basis points of reduction.

A review of the markets.

After one of the worst weeks post Labor Day (September 3-6), especially in the tech heavy NASDAQ (QQQ) as well as small cap stocks (IWM), the market recovered.  We saw the exact opposite action from the previous week with 5 up days for the S&P 500.  Additionally, we saw a rebound in chip stocks.  Small cap stocks must have gotten the memo that interest rates are about to decline soon, as they blasted off, especially on Friday.

Perhaps the most startling example of the bullish nature of the markets this past week was Wednesday when all the markets were in steep declines from the opening bell (Dow down 600+ points intraday) only to turn midday.  The major indices finished up at the close.  See chart below:

So far this year, these sudden and dramatic course changes have been followed by almost a mirror image of bullish activity as investors are pushed out, then pulled back into the markets.  I can’t help thinking that this is a concerted effort by hedge funds and large institutional investors manipulating the markets for quick near-term profits.

Also, just based on volume spikes, one could see that retail investors have been quick to pull the plug on short-term profits and become heavy sellers only to discover a few days/weeks later they need to put the money back to work.   A quick glance at a few charts illustrating the recent S&P activity and these short-term corrections over the past year.  See below:

There is a sense that when investors sell and see the market turn around and head higher, they experience FOMO-Fear of Missing Out.   See the chart below which shows this during the past 25+ years:

In the above chart, Jason points out that when a big weekly reversal occurs near a new high, the S&P 500 has historically had above-average returns.  Since 1957, 10 other significant reversals have occurred within 3% of a 52-week high (-3% weeks are followed by +3% weeks).  This is what happened in the past two weeks.

Looking out over the next three months, the S&P 500 has been higher 90% of the time, by an average of +5.2% versus a typical three-month average of +3.5%. Summary: after recovering 4% from the previous week’s -4% loss, over the decades similar reversals have been MORE bullish than bearish for the market.  Another good chart to illustrate this from our reliable source, Ryan Detrick is below:

Another good illustration of what occurred this past week is contained in the chart below.  This shows the recovery in the indices as well as the chip stocks (SMH) and biotechnology (XBI).  I like that these two areas are highlighted given Mish’s emphasis on these two sectors of the market in her Economic Modern Family.  SMH is represented by “Sister Semiconductor” and XBI is represented by “Big Brother Biotechnology”.  

Mish points out that these are two vital areas showing “risk on” and the health of the economy and the markets.  This robust recovery in stock prices, especially these two areas this past week, bodes well for the longer-term health of the markets.  If you would like more information on the Economic Modern Family and/or like to read Mish’s book “Plant Your Money Tree”, go here.

The summary of the above chart is that the short-term trend of the market has turned higher.  These 4 ETFs had all fallen below a declining 5-day moving average and are all now above a rising 5-DMA.  For this to occur in September and with an upcoming potential loosening of the Fed overnight lending rates is a sign of a more positive and bullish near term trend, these analysts believe.

If you read the Market Outlook from last week, you would have noticed that we did tell you that September 8-18 tends to be a more positive period in the difficult month of September.  The jury is out as to whether or not this will inevitably be the negative month many investors expected.

Fun statistic of the week.  See chart below:

What is driving the market’s return?

There are several factors.  In these weekly Market Outlooks, we try to identify the main drivers of the stock market.  Let’s review a few of the most important drivers so far in 2024:

• The economy remains on solid footing. After plenty of prognosticators predicting that we would go into a recession, it has not happened (yet).  Most of these pundits used the inverted yield curve, elevated price-to-earnings ratios, a higher regulatory environment, slowing GDP, geopolitical stress and possible military scenarios playing out around the world as reasons we should see a recession.
• Inflation is heading down towards the Fed’s 2% target. We have all been under the punitive effects of higher costs for just about everything.  Wage growth has been positive but probably not keeping up with the pace of inflation.  Nonetheless, the mere fact that it is on the decline has helped fuel a positive environment for stocks.
• Forecasts for interest rate declines. This has been discussed since April and while it has not happened yet, this week’s potential Fed action has already contributed to driving stock prices higher. Most analysts have begun to factor in a potentially 100 basis-point reduction of interest rates.  The fact that interest rates have come down (dramatically) by market forces has also helped steer money into risk-on assets and stocks.
• I believe TINA is still alive and well. That stands for There is No Alternative.  Other markets, including fixed income securities, are only up in the low single digits.  Investors are always targeting the best potential return markets.  As Mr. Wonderful says on Shark Tank, money goes where it is treated the best.
• We are in an election year. Of the 4-year presidential cycle, the 4^th year is second best and given many of the metrics we have provided throughout the year about what happens when the first quarter is positive, coming off a positive 3^rd year (the best in the cycle), etc. we were expected to have a positive and healthy stock market.
• The BIGGEST reason the stock market is doing well is that earnings have been coming in better than expected. This will always be one of the main drivers of stock market performance (along with declining interest rates and declining inflation).  To better illustrate just how good the 2024 corporate earnings have been, we provide the following chart:

SPX EPS revisions. “So far in 2024, Forward 12M EPS has been revised higher by +9.3%. The avg (1991 - 2023) is +6.2% by 9/10. This year ranks +3.1% better vs avg (by a solid margin). Fundamentals improving = validation for bulls.”

• The last point that may be driving the stock market higher is the use of AI in many different industries and the application of AI to produce additional corporate efficiencies. We offer the following chart to illustrate this:

AI vs. margins. "AI may drive margin expansion for 23 of 25 industry groups."

A word of caution going forward.  (and a reason that the Fed could get more aggressive in reducing rates over the next year) is that estimates of corporate earnings are starting to look precarious with potential slowing of earnings “beats” in the next few quarters.  See chart below:

NFIB (National Federation of Independent Businesses). 37% of respondents reported deteriorating earnings, the largest share since March 2010, due to weaker sales and rising costs.

Can the stock market hold up?

We bring to your attention that with all the positive superlatives noted above, the near-term market outlook still looks fuzzy to us and may require remaining nimble and exercising a fair degree of risk management.  The risk appetite is starting to slow, no matter how robust this past week’s performance was.

We also note that people like Warren Buffet (who sold a large stake in his biggest company positions) are moving to cash.  These small bits of information remind us that we have had a very good run in the stock market since the fall of 2022 and we WILL eventually see a prolonged correction or even a bear market.

Last week we addressed the reversing of the inverted yield curve and what has transpired in the past.  We strongly suggest you go back and reread that article for additional clarity on this subject.

Here is some additional data on the Investment Manager Index which recently came out showing some level of concern among investment managers as they are looking into the near future.

Investment Manager Index. "Risk appetite has deteriorated sharply in September to its lowest for nearly two-and-a-half years ... Sentiment has been hit by concerns over valuations amid economic growth worries and political uncertainty."

Investor Intelligence. "Bulls are leaving the building: II bears are rising as bulls drop to lowest level of 2024. S&P 500 has struggled to make sustained upside progress over the past decade when the Bull - Bear Spread has been less than 20%."

Summary.

This writer and this company like to present different perspectives of an analysis of the markets and the economy.  Therefore, while we are showing charts with a positive bias, we also want to provide a few that may present similar data in a different light.  This is why we take up space showing different points of view for your consideration.

It is also why we utilize rules based, quantitative built models that run on algorithims that factor in bullish, bearish and neutral investment patterns.  They are not always right, but if you look at the longer-term (3-5 years or longer) they would have delivered market beating returns with less risk.

If you would like to get more information on how our investment models operate and what their long-term performance is, please contact Rob@MarketGauge.com.  He is a master at helping you understand your risk orientation and what, if any of our investment models can help you meet your investment goals.

We end with a bullish prognostication of the S&P 500 and the Gold markets.  See below:

Bull markets. "The average duration of a bull market NOT following a former recession is 33 months. That would take $SPX to May of 2025 … if the bull market ended in July, it would be the shortest bull market in history, tied with that from 2020-2022."

Finally, a note on GOLD.

I vividly recall traveling with Mish to The Money Show back in October 2023.  She led several sessions addressing the Show’s attendees about using the MarketGauge tools.  She also sat on panels where she shared her views on the markets and where she would invest money for the remainder of 2023 and for 2024.  She does a great job and this why she is often featured on National TV shows like Charles Payne on Fox Business.

During the conference and on her numerous TV appearances and without equivocation, she was pounding the table for investors to take a position in the metals, including Gold (GLD), Silver (SLV) and the Gold Miners, (GDX).

I wanted to highlight this because this past week AGAIN, Gold and Gold Miners made new yearly highs as well as GLD making a new all-time high.  To put this in perspective, see the table below highlighting different asset class indices which could be purchased through highly traded and liquid ETFs”

I hope that this Outlook has uncovered a few points and facts you may not be aware of or thought about.  Our goal is to provide observations of the economy, government policy and the markets and what effect they may have on your own investment portfolio in the future.

Hopefully we meet your expectations as you sit down and spend valuable time to read this Outlook.  If you have ANY feedback, comments or questions, please take a moment to drop us an email.  I can be reached at DonnG@MarketGaugePro.com and as well you can reach KeithS@MarketGaugePro.com.  We would enjoy hearing from you.

We all hope you have a successful investment week ahead.

 

 

 

Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral.  The video analysis dives deeper.

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Risk On

• Stocks had an amazing recovery, rallying between +2.5%-6%, with all four indexes now in bull mode. (+)
• With the exception of energy, all market sectors were up, led by the recovery in semiconductors, consumer discretionary, and home builders. 10 of the 14 sectors we track are in bullish phases. (+)
• The McClellan Oscillator moved back above neutral into positive territory and the cumulative advance decline hit a new recent high, for both, though particularly strong for the S&P. (+)
• The color charts have a positive read for S&P and Dow. Neutral to negative for QQQ. (+)
• The percentage of stocks above key moving averages flipped positive this week both on an intermediate and short-term basis. (+)
• Growth regained its bullish phase and on a relative basis, growth and value are matching each other based on the Triple Play indicator. (+)
• Interest rates at all parts of the yield curve consolidated their recent gains, indicating the market believes the Fed will significantly reduce rates in the coming months. (+)
• All modern family members had a strong bounce this week with XRT, IWM, IBB, and KRE recovering to a bullish phase by Friday. SMH, despite a +10% gain, is still in a strong warning phase. (+)
• Foreign equities regained their bullish market phases, though they are underperforming the U.S. equities. (+)

Neutral

• Volume patterns moved up to a neutral reading and only the S&P has more accumulation days than distribution. (=)
• In terms of pure momentum, the four indexes are showing a wide divergence from price action as real motion is showing bear phases in 3 out of the four indexes. (=)
• Gold miners, silver, and gold all had explosive moves with gold hitting new all-time highs. (=)
• 52-Week New High New Low ratio is giving a mixed read. (=)
• Volatility remains elevated but trending down in the short-run. (=)
• Commodities had a strong week, led by gold and silver. DBA hit a multi-month high. (=)
• Oil is in a distribution phase with its momentum slowing down. It is a bit oversold subject to mean reversion and retesting the 200 and 50 Day Moving Averages. (=)

Risk Off

• Risk gauges remain fully risk-off. (-)