Stock Market Ends Week on Optimistic Note, With a Few Surprises



  • The stock market started out slow, sold off, and then recovered some of those losses to end the week on an optimistic note.
  • Market internals continue to be strong indicating that the stock market has a bullish bias.
  • Several stocks made new highs including NVDA, FSLR, and DELL.

It was a roller-coaster week in the stock market, a reminder that, when markets are trading at their all-time highs, it pays to be cautious. Any negative news can trigger emotions, resulting in a domino effect reaction.

In the early part of the week, the stock market was pretty lethargic, with investors waiting for Nvidia’s earnings. When NVDA earnings were announced after the close on Wednesday, the stock price soared in after-hours trading. The upside move continued when the market opened on Thursday, with the stock price closing at a record high on Friday.

However, despite NVDAs’ rally, the rest of the market threw some surprises. On Thursday, there was a significant selloff, which threw many investors off. The broader equity indexes fell, as did precious metals.

The May Purchasers Manufacturing Index (PMI) came in higher than expected, which may have reminded investors that the strong economy could mean higher rates for longer. The FOMC minutes this week suggested that Fed members aren’t confident that inflation has come down enough to warrant rate cuts any time soon.

On Friday, the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ) recovered some of Thursday’s losses. This was a surprise; you’d think the selloff would continue ahead of the Memorial Day weekend.

Follow the live chart!

Another interesting area is the price action in US Treasury yields, which seem to. be going through a consolidation pattern. Until they break out of this pattern, there’s no telling which way yields will go. The Fed is committed to bring inflation to 2%, but we don’t know how long it’ll take to get there.

CHART 1. 10-YEAR US TREASURY YIELDS IN CONSOLIDATION. Yields could break out in either direction. A lot depends on future economic data points. Chart source: For educational purposes.

A comforting thought is that the CBOE Volatility Index ($VIX) is low, indicating that investors aren’t fearful. This supports a bull market thesis. It’s challenging to forecast which direction the stock market will move, and we could see continued sideways movement for a while, especially after the FOMC minutes.

You can sense the presence of investor enthusiasm as stocks continue to reach all-time highs. Over 100 stocks hit an all-time high (check out the New All-Time Highs Predefined StockCharts scan). The New Highs-New Lows index ($NYHL) also shows more new highs than lows, although the number of new highs is not as high as it was in recent weeks (see chart below).

CHART 2. NEW HIGHS – NEW LOWS. The number of new highs is greater than the number of new lows. Chart source: For educational purposes.

A Few Stocks to Note

Follow the live chart!

Look at how First Solar (FSLR) performed this week. The stock surged, surpassing its last high of around $230 about a year ago. Despite FSLR’s rise, its relative strength compared to the S&P 500 index is at -32.81%. It’s got a lot of catching up to do.

CHART 3. FSLR JUMPS ON THE AI RIDE. The AI infrastructure needs to depend on energy companies and

What makes the stock appealing? FSLR has attracted the attention of analysts as a company that will benefit from the AI revolution. There’s a lot of talk about how the increased capacity of data centers will require energy, and FSLR could be one company that would benefit from the increased demand.

FSLR made it to three StockCharts Predefined Scans—New 52-Week Highs, Moved Above Upper Price Channel, P&F Double Top Breakout.

Another stock that hit a new high is Dell Technologies (DELL), again because of its contribution to the AI space. From the daily chart of DELL (see below), the stock is in an upward trend, and its relative strength index (RSI) has just crossed above the 70 level.

Follow the live chart!

The stock also reached the top 5 SCTR stocks (see end-of-week wrap-up below). Will the strength continue? We’ll find out when the company announces earnings next week.

CHART 4. DELL HITS NEW HIGHS. The stock has been gaining strength and is trading well above its 50-day simple moving average. Will earnings push this stock higher? Chart source: For educational purposes.

Closing Thoughts

With NVDA earnings in the rearview mirror, could FSLR or DELL be the next stock investors will get excited about? You can’t rule it out. This market hits you with surprises, so be prepared for anything. Even though the market went through its ups and downs this week, the overall sentiment appears to be bullish, a good way to start the holiday weekend.

End-of-Week Wrap-Up

  • S&P 500 closes up at 5,304.72, Dow Jones Industrial Average up 0.01% at 39,069.59; Nasdaq Composite up 1.1% at 16,920.79
  • $VIX down 6.66% at 11.92
  • Best performing sector for the week: Technology
  • Worst performing sector for the week: Energy
  • Top 5 Large Cap SCTR stocks: MicroStrategy Inc. (MSTR); Vistra Energy Corp. (VST); Super Micro Computer, Inc. (SMCI); Vertiv Holdings (VRT); Dell Technologies (DELL)

On the Radar Next Week

  • Earnings from Salesforce (CRM), Abercrombie and Fitch (ANF), Dell Technologies (DELL).
  • March Home Prices
  • Consumer Confidence
  • April PCE
  • Fed speeches

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Jayanthi Gopalakrishnan

About the author:
Jayanthi Gopalakrishnan is Director of Site Content at She spends her time coming up with content strategies, delivering content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was Managing Editor at T3 Custom, a content marketing agency for financial brands. Prior to that, she was Managing Editor of Technical Analysis of Stocks & Commodities magazine for 15+ years.
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Breakdown in Mega-Cap Growth Confirms Bear Phase



  • Early breakdowns from AAPL and TSLA provided initial warnings of a late stage bull market.
  • Exponential gains in stocks like SMCI and MSTR have now turned into steep pullbacks with both stocks breaking below moving average support.
  • With AMZN and NFLX finishing the week below their 50-day moving average, the rotation away from growth leadership may now be in full force.

While our major equity benchmarks showed incredible strength in Q1 2024, breadth conditions have been deteriorating since mid-March. Despite the weakening breadth readings, and the initial breakdowns of the S&P 500 and Nasdaq 100, leading growth names, including the formerly-described Magnificent 7 stocks, had remained in clearly-defined uptrends.

This week, some of the top-performing stocks in the S&P 500 finally broke below their 50-day moving averages. While this signal on its own is not a sign of a market top, these breakdowns represent just one of the many clear signals that the bull market off the October 2023 low may be over.

Today, we’ll briefly review some of the early breakdowns in the mega-cap growth space, how some of the top-ranked SCTR stocks have shown recent weakness, and why the “Fantastic Four” (current front-runner to replace the “Magnificent 7 moniker) breaking down may represent a key confirmation for a new bear phase.

The Early Breakdowns: Apple (AAPL) & Tesla (TSLA)

Tesla has been in a confirmed downtrend since July 2023, and Apple has appeared in a weak technical configuration since failing to break above the $200 level in December and January. But both charts have literally and figuratively made a new low this week.

Note how both charts have remained below downward-sloping 50-day moving averages since mid-January. Also observe how both have shown failed attempts to break above that moving average in recent months. When stocks are making lower lows and lower highs, and trending below downward-sloping moving averages, I’ve learned it’s best to avoid taking action until some of those conditions start to change. 

Ready to talk market breadth indicators? Our next free webinar, Breaking Down Breadth, will focus on breadth conditions now vs. previous market tops. Join me on Tuesday, April 23rd at 1pm ET as we review the current market environment through the lens of breadth indicators, compare them to conditions at previous market tops, and discuss the likelihood of further drawdowns for the S&P 500 and Nasdaq. Sign up HERE for this free webcast!

As these stocks broke down, diverging from most other leading growth names, the S&P 500 and Nasdaq 100 pushed much higher. So let’s see some of the stocks that served as leadership in Q1.

The Top-Ranked SCTRs: Super Micro Computer (SMCI) & MicroStrategy (MSTR)

Here, we have two names that were less well-known until they experienced exponential gains earlier this year. And while they certainly appeared overextended in March, they have now both come right down to earth.

From the end of 2023 to their peaks in March 2024, SMCI and MSTR gained 350% and 175%, respectively. They both were a far distance from moving average support, giving clear signs of overbought conditions. So far in April, both stocks have traded much lower, and they each finished this week below their 50-day moving averages.

It’s normal for stocks in strong uptrends to pull back and test moving average support. Indeed, the 50-day moving average often serves as a potential entry point for a “buy on the dips” strategy. But when top performers fail to hold this crucial short-term support level, I have found that it often implies a broader move to more risk-off positioning.

What about the best of the biggest–in other words, the most magnificent of the Magnificent 7?

The Fantastic Four Breakdowns: Netflix (NFLX) & Amazon (AMZN)

That brings us to perhaps the most concerning development this week. As I recently posted on my social media accounts, “As long as $AMZN and $NFLX remain above the 50-day moving average, you can make an argument for ‘short-term pullback’ as opposed to ‘protracted and painful decline.'” Unfortunately, this week, we finally observed this breakdown of breakdowns.

Mega-cap growth stocks wield an outsized influence on our top-heavy growth-dominated equity benchmarks. In recent weeks, bearish momentum divergences, weakening breadth conditions, and breaks of “line in the sand” support levels had us thinking market weakness over market strength. But the resilience of the Fantastic Four stocks gave us just a glimmer of hope that a pullback may be limited.

Given this week’s breakdown in the charts of previous top performers, we feel this just may be the beginning of the great bear phase of Q2 2024.



P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
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Rules-Based Money Management – Part 1: Popular Indicators and Their Uses

Note to the reader: This is the seventeenth in a series of articles I’m publishing here taken from my book, “Investing with the Trend.” Hopefully, you will find this content useful. Market myths are generally perpetuated by repetition, misleading symbolic connections, and the complete ignorance of facts. The world of finance is full of such tendencies, and here, you’ll see some examples. Please keep in mind that not all of these examples are totally misleading — they are sometimes valid — but have too many holes in them to be worthwhile as investment concepts. And not all are directly related to investing and finance. Enjoy! – Greg

To begin Part III: Rules-Based Money Management, we need to review a few basic technical indicators that are referenced frequently. Their concepts are used throughout this part of the book. Remember, Part III is the creating of the weight of the evidence to identify trends in the overall market, a ranking and selection process for finding securities to buy based on their individual and relative momentum, a set of rules and guidelines to provide you with a checklist on how to trade the information, and the results of my rules-based trend following strategy, called Dance with the Trend.

Moving Averages and Smoothing

Most times, daily stock market data is too volatile to analyze properly. What’s needed is a way of removing much of this daily volatility. There is such a method, and that is the subject of this section on smoothing techniques.

Smoothing refers to the act of making the time series data smoother to remove oscillations, but keeping the general trend. It is a better adverb to use than always trying to explain that you take a moving average of it or take the exponential average of it; just say you are smoothing it. Some of the advantages of doing this are:

  • Reducing day-to-day fluctuations.
  • Making it easier to identify trends.
  • Making it easier to see changes in trend.
  • Providing initial support and resistance levels.
  • Much better for trend following.

One of the simplest market systems created, the moving average, works almost as well as the best of the complicated smoothing techniques. A moving average is exactly the same as a regular average (mean), except that it “moves” because it is continuously updated as new data become available. Each data point in a moving average is given equal weight in the computation; hence, the term arithmetic, or simple, is sometimes used when referring to a moving average.

A moving average smooths a sequence of numbers so that the effects of short-term fluctuations are reduced, while those of longer-term fluctuations remain relatively unchanged. Obviously, the time span of the moving average will alter its characteristics.

J. M. Hurst, in The Profit Magic of Stock Transaction Timing (1970), explained these alterations with three general rules:

  1. A moving average of any given time span exactly reduces the magnitude of the fluctuations of durations equal to that time span to zero.
  2. The same moving average also greatly reduces (but does not eliminate) the magnitude of all fluctuations of duration less than the time span of the moving average.
  3. All fluctuations that are greater than the time span of the average “come through,” or are present in the resulting moving average line. Those with durations just a little greater than the span of the average are greatly reduced in magnitude, but the effect lessens as periodicity duration increases. Very long duration periodicities come through nearly unscathed.

Simple or Arithmetic Moving Average

To take an average of just about any set of numbers or prices, you add up the numbers, then divide by the number of items. For example, if you have 4+6+2, the sum is 12, and the average is 12/3 = 4. A moving average does exactly this, but as a new number is added, the oldest number is removed. In the previous example, let’s say that 8 is the new number, so the new sequence would be 6+2+8. The original first number (4) was removed because we are only adding the most recent three numbers. In this case, the new average would be 16/3 = 5.33. So by adding an 8 and removing a 4, we increased the average by 1.33 in this example. For those so inclined, here’s the math: 8-4=4, and 4/3 =1.33.

Another feature of the simple moving average is that each component is treated equally — that is, it carries an equal weight in the calculation of the average. This is shown graphically in Figure 12.1. Note that it does not matter how many data points you are averaging; they each carry an equal contribution to the value of the average.

Because of the equal weighting of the data components in a simple moving average, the larger the average, the slower it will react to changes in price.

Let me share a little story about price charts and moving averages. Back in the 1980s, we had one of the original online services, called Prodigy. At one point, they started to provide some simple stock charts with a single moving average on them. I kept looking at it and knew something was wrong, because I had studied and created these types of charts for years. I finally discovered that they were using separate scales for the price and the price’s moving average. Although the values would be correct, the display was not because the average was using its isolated price scale. I wrote (yes, there was no e-mail then) them and explained. The first response was denial that they could be doing it wrong. I mailed them some charts showing their way and the proper way to display moving averages over price by sharing the same vertical scale. It took a long time and many letters before I finally convinced someone that they had it wrong. In appreciation, they sent me a small digital clock worth about $1.25 (battery not included).

Exponential Moving Average

This method of averaging was developed by scientists, such as Pete Haurlan, in an attempt to assist and improve the tracking of missile guidance systems. More weight is given to the most recent data, and it is therefore much faster to change direction and respond to changes in price. It is sometimes represented as a percentage (trend percent) instead of by the more familiar periods. For example, to calculate a 5% exponential average, you would take the last closing price and multiply it by 5%, then add this result to the value of the previous period’s exponential average value multiplied by the complement, which in this case is 1 –.05 =.95. Here is a formula that will help you convert between the two:

    K=2/(N + 1) where K is the smoothing constant (trend percent) and N is the number of periods.

    Algebraically solving for N: N =(2/K)-1.

For example, if you wanted to know the smoothing constant of a 19-period exponential average, you could do the math, K=2/(19 +1)=2/20=0.10 (smoothing constant), or 10% trend as it is many times expressed. In the example previously that used a 5% exponential average, the math is as follows:

    5% Exp Avg=(Current price x 0.05) + (Previous Exp Avg x 0.95)

Figure 12.2 shows how the weight of each component affects the average. The most recent data is represented by the far right on the graph.

Now for the really important piece of knowledge about the difference between the simple moving average and the exponential moving average. Notice in Figure 12.3 how long it takes the simple average (dashed) to reverse direction to the upside. From the time the price line climbs through the dashed line, it takes five to six days before the dashed line begins to rise in this example (upward arrow—SMA). In fact, immediately after the price goes below the dashed line, the dashed line is still falling. Both averages used the same number of periods.

Now note how quickly the darker exponential average changes direction when the price line moves through it (upward arrow—EMA). Immediately! Yes, because of the mathematics, the exponential average will always change direction as soon as the price line moves through it. That is why the exponential average is used, because it hugs the data tighter and eliminates much of the lag that is present in the simple average.

Now, when it comes to the question as to which is better, the answer is always that it depends on what you are trying to accomplish. Sometimes the simple average is better because of its lag, and sometimes not. The same goes for the exponential average; sometimes it is better, sometimes not. Personally, I have found that the exponential average is better for longer-term analysis, say, more than 65 periods (days). However, that becomes a personal preference as you build experience.


George Lane promoted it and Ralph Dystant probably created it; however, I know that Tim Slater, the creator of CompuTrac software in 1978, was probably the one that coined the name Stochastics. This is an odd name, as stochastic is a mathematical term that refers to the evolution of a random variable over time. Stochastics is a range-based indicator that normalizes price data over a selected period of time, usually 14 periods or days. It basically shows where the most recent price is relative to the full range of prices over the selected number of periods. This display of price location within a range of prices is scaled between 0 and 100. Usually there are two versions, one called %K, which is the raw calculation, and the other %D, which is just a three-period moving average of %K. Don’t get me started why there are two names for a calculation and its smoothed value. I met George Lane a number of times and found him to be a delightful gentleman; George passed away in 2008.

Personally, this is about my favorite price-based indicator. It seems that almost everyone uses Stochastics as an overbought/oversold indicator. While it is good in a trading range or sideways market, it does not work well in a trending market when used this way. However, it is also an excellent trend measure. This is good because many stocks and markets trend more than they go sideways.

So how does it work as a trend measure? If you think about the formula and realize that as long as prices are rising, then %K is going to remain at or near its highest level, say over 80. Therefore, as long as %K is over 80, you can assume you are in an uptrending market. Likewise, when %K is below 20 for a period of time, you are in a downtrending market. Personally, I like to use %D instead of %K for trend analysis, as it is smoother with less false signals.

Figure 12.4 shows a 14-day Stochastic with the S&P 500 Index above. The three horizontal lines on the Stochastic are at 20, 50, and 80.

If you use Stochastics as an overbought/oversold indicator, it will work better if you only take signals that are aligned with a longer-term trend. For example, if the general trend of the market is up, then only adhere to the buy signals from Stochastics. Finally, you are not restricted to the 80 and 20 levels to determine overbought and oversold, you can use any levels you feel comfortable with. In fact, if using %D for trend following, also using 30 and 70 will help eliminate whipsaws.

One of the really unique properties of this indicator is that it can be used to normalize data. Let me explain. If you wanted to see data prices that were contained within a range between 0 and 100, then this formula would do that. For example if you had a year’s worth of data, which is about 252 trading days, all you need is to merely set the number of periods for %K to 252 and you would be able to see where prices moved over the last year. This becomes especially valuable when comparing two different stocks or indices.

It should also be noted that Stochastics was designed to be used with data that contains the High, Low, and Close price. It can work with close-only data, but the formula must be adjusted accordingly.

RSI (Relative Strength Index)

RSI was one of the first truly original momentum oscillator indicators that was created prior to desktop or personal computers. Welles Wilder laid out the concept on a columnar pad. Basically, RSI takes a weighted average of the last 14 days’ (if using 14 for the number of periods) up closes and divides by the last 14 days’ down closes. It is then normalized so that the indicator always reads between 0 and 100. Parameters often associated with RSI for overbought are when RSI is over 70, and oversold when it is below 30.

The Relative Strength Index (RSI) can be used a number of different ways. Probably the most common is to use it the same as Stochastics in an overbought/oversold manner. Whenever RSI rises above 70 and then reverses direction and drops below 70, it is a sign that the down closes have increased relative to the up close and the market is declining. Although this method seems to always be popular, using RSI as a trend measure and one to help spot divergences with price seems like two better uses for RSI. Figure 12.5 shows RSI with the S&P 500 Index above. The horizontal lines on RSI are at 30, 50, and 70.

RSI is probably one of the most popular indicators ever developed. I think that is because most could not generate the formula themselves if it were not a mainstay in almost every technical analysis software package. Wilder developed it using a columnar pad and had to come up with a way to do a weighted average of the up and down closes. It is not a true weighted average, but gets the job done.

One of the really big problems that I see with RSI is that in long continuous trends, it can be using some relatively old data as part of its calculation. For an example, let’s say the stock is in an uptrend and has been for a while. The denominator is the average of the down closes in the last 14 days. If the uptrend is strong, there might not be any down closes for a period of time. If there were not any in the last 14 days, without the Wilder smoothing technique, the denominator would be equal to zero, and that would render the indicator useless. Because of this situation, the calculation for RSI can use relatively old data. That is why RSI seems to work well as a divergence indicator, because of the old data. This is generally caused by the fact that the previous up trend keeps the denominator, which uses down closes, fairly inactive, but once the down closes started hitting again, it has a strong effect on RSI.

Moving Average Convergence Divergence (MACD)

MACD is a concept using two exponential averages developed by Gerald Appel. It was originally developed as the difference between the 12- and 26-day exponential averages; the same as a moving average crossover system, with the periods of the two averages being 12 and 26. The resulting difference, called the MACD line, is then smoothed with a nine-day exponential average, which is referred to as the signal line. Gerald Appel originally designed this indicator using different parameters for buy and sell signals, but that seems to have faded away and almost everyone now uses the 12–26–9 combination for both buy and sell. The movement of the MACD line is the measurement of the difference between the two moving averages. When MACD is at its highest point, it just means that the two averages are at their greatest distance apart (with short above long). And when the MACD is at its lowest level, it just means the two averages are at their greatest distance apart when the short average is below the long average. It really is a simple concept and is a wonderful example of the benefits of charting, because it is so easy to see.

MACD, and in particular, the concept behind it, is an excellent technical indicator for trend determination. Not only that, but it also shows some information that can be used to determine overbought and oversold, as well as divergence. You could say it does almost everything.

Figure 12.6 shows the MACD with the S&P 500 Index above. The solid line is the 12–26 MACD line and the dotted line is the nine period average.

Please keep this in mind: Although MACD is a valuable indicator for trend analysis, it is only the difference between two exponential moving averages. In fact, if you used price and one moving average, it would be similar in that one of the moving averages was using a period of one. This is not rocket science! Figure 12.6 is an example of MACD with its signal line.

A Word of Caution

Technical indicators generally deal with price and volume. Price involves the open, high, low, and close values. There are literally hundreds, if not thousands, of technical indicators that utilize these price components. These indicators use various parameters to make the indicator useful in analyzing the market.

Generally, the Relative Strength Index (RSI) is considered an overbought/oversold indicator, while Moving Average Convergence Divergence (MACD) is considered a trend indicator. With an intentional reworking of the parameters used in each, Figure 12.7 shows both the RSI and MACD of the S&P 500 Index.

Notice that they both look almost exactly the same. When you are working with only price or its components, you must be careful to not overanalyze or over-optimize the indicator or you will just be looking at the same information. See the section on Multicollinearity in previous articles for more evidence of this potential problem.

There are a host of money management techniques that have surfaced in the investment community. Each has its merits and each has its shortcomings. This section is provided to complement the book’s completeness, and does not dwell into the details.

The Binary Indicator

This part of the book also shows many charts of market data and indicators. Many will include what is called a binary measure. Binary means that it only gives two signals; it is either on or off, similar to a simple digital signal.

Figure 12.8 is a chart of an index in the top plot and an indicator in the bottom plot. The signals generated by the indicator are whenever it crosses the zero line shown on the lower plot. Whenever the indicator is above the line, it means the trend is up, and whenever the indicator is below the line, it means the trend is down (not up). To further simplify that concept, the tooth-like pattern, called the binary and overlaid on the indicator, gives the exact same information without all the volatility of the indicator. Notice that when the indicator is above the horizontal signal line that the binary is also above the line, and whenever the indicator is below the horizontal line, so is the binary. With that, we can then plot the binary directly on top of the index in the top plot and see the signals. In fact, with this knowledge, the entire bottom plot could be removed and no essential information would be lost.

Other conventions adapted to Part III of this book that you need to know are that, when discussing indicators or market measures, there are parameters used to give them specific values based on periods. A period can be any measure of time, hourly, daily, weekly, and so on. Here we will always stick to using daily analysis unless addressed locally. The terms issue and security are often used; I will stick to using ETFs as the investment vehicle.

When showing many measures that are in the same category, such as ranking measures, I attempt to show them individually, but over the same period of time using the same ETF, such as the SPY.

How Compound Measures Work

Before moving on, a concept needs to be explained. Figure 12.9 will help you understand how a compound measure works. First, you need to know that this is not a complex system; whenever two of the three indicators are in agreement, the compound measure moves in the same direction. This means that all three could be signaling, but it only takes two to accomplish the goal.

In Figure 12.9 the top plot is the Nasdaq Composite. The next three plots contain the binary indicators for the three components; in this example, they are called 1, 2, and 3. There are four instances of signals from those three components, labeled in the top plot as A, B, C, and D. Let’s go through them, starting with signal A. Notice that there are two vertical lines, with the first one being created by indicator 3. Then notice how indicator 3 dropped from its high position to its low position; that is a binary signal from indicator 3. The next vertical line shows up when indicator 2 drops to its low position. We now have two of the three indicators dropping to their low position, which means the compound binary indicator overlaid on the Nasdaq Composite in the top plot now drops to its low position.

The second signal, at B, occurs when both indicator 2 and 3 both drop to their low position at the same time; once again, this is a signal for the compound binary in the top plot to drop to its low position. Moving over to signal C, you can see that indicator 3 rose to its top position followed a few days later by indicator 2 rising to its top position, which in turn causes the compound binary in the top plot to rise to its top position.

Example D below shows indicator 2 dropping to its low position. This has caused the compound binary to drop because, if you will notice, indicator 3 had already dropped to its low position many days prior to that of indicator 2. In example D, notice that both indicator 2 and 3 both rose on the same day and indicated by the rightmost vertical line, which of course caused the compound binary to also rise. The concept is simple; it only takes two of the three indicators to control the compound binary in the top plot. It does not matter which two it is or in what combination. As you can hopefully see, the process could be expanded to using five indicators and using the best three of the five.

Now try to figure out the compound measure below without any visual or verbal assistance. In Figure 12.10, the top plot contains the Nasdaq Composite and the compound binary. There are binaries for three indicators below and they work just like the example above, any two that are on is a signal for the compound binary to move in the same direction. Good luck.

Thanks for reading this far. I intend to publish one article in this series every week. Can’t wait? The book is for sale here.

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The Hoax of Modern Finance – Part 11: Valuations, Returns, and Distributions

Note to the reader: This is the eleventh in a series of articles I’m publishing here taken from my book, “Investing with the Trend.” Hopefully, you will find this content useful. Market myths are generally perpetuated by repetition, misleading symbolic connections, and the complete ignorance of facts. The world of finance is full of such tendencies, and here, you’ll see some examples. Please keep in mind that not all of these examples are totally misleading — they are sometimes valid — but have too many holes in them to be worthwhile as investment concepts. And not all are directly related to investing and finance. Enjoy! – Greg

Market Valuations

Because secular markets are defined by long-term swings in valuations, let’s look at the Price Earnings (PE) ratio and study its history. Robert Shiller created a valuable measure of PE valuation that uses trailing (actual) earnings, averaged over a 10-year period. Here’s how it is calculated:

  • Use the yearly earning of the S&P 500 for each of the past 10 years.
  • Adjust these earnings for inflation, using the CPI (i.e. quote each earnings figure in current dollars).
  • Average these values (i.e., add them up and divide by 10), giving us e10.
  • Take the current Price of the S&P 500 and divide by e10.

Figure 8.1 shows the S&P Composite on a monthly basis adjusted for inflation, back to 1871, with a regression line so you can get a feel (visually) of where the current price is relative to the long-term trend of prices. The lower plot is the Shiller PE10 plot, with peaks and troughs identified with their values. You can see that all prior secular bears ended with PE10 as a single digit (4.8, 5.6, 9.1, and 6.6). The PE10, on March 9, 2009, only got down to 13.3, which is considerably higher than the level reached by all prior secular bear lows. Based on this simple analogy, I think we have yet to see the secular bear low for this cycle. Remember, it does not mean that the prices have to go lower than they did in 2009; it just means the PE10 should drop to single digits. Remember, PE is a ratio of Price over Earnings. To make the ratio smaller, either the price can decline, the earnings can increase, or a combination of both.

As of December 31, 2012, the PE10 is at 21.3. Referencing the small box in the lower left corner shows that this value is in the fifth quintile of all the PE data. Based on this analysis, the market is overvalued.

So when the financial news noise is constantly parading analysts by touting the PE as overvalued or undervalued, you can count on the fact that they are using the forward PE ratio. The forward ratio is the guess of all the earnings analysts. They are rarely correct. Ignore them.

Finally, Figure 8.2 shows the PE10 in 10 percent increments or deciles. It shows the extreme level reached in the late 1990s from the tech bubble, it shows the 1929 peak, and it shows that, as of December 31, 2012, we are at the 82nd percentile of PE10. This puts the PE10 overvalued on a relative basis, and also on an absolute basis, as shown in Figure 8.1. Remember, PE10 used real reported (trailing) earnings, not forward (guess) earnings. As Doug Short says on his website at A more cautionary observation is that when the PE10 has fallen from the top to the second quintile, it has eventually declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a PE10 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to continue their strong and prolonged surge. If the 2009 trough was not a PE10 bottom, when would we see it occur? These secular declines have ranged in length from more than 19 years to as few as three. As of December 31, 2012, the decline in valuations was approaching its 13th year.

Secular Bear Valuation

Figure 8.3 shows the Shiller PE10 monthly for all the past secular bear markets since 1900, with the current secular bear (as of 2013) in bold. What is really interesting about this chart is that most of the secular bears began with PE Ratios in the 20 to 30 range and ended with them in the 5 to 10 range. The current secular bear began with a PE in the mid-40s and is now only back down to the level that the previous secular bears began. That could imply that the secular bear that began in 2000 could be a long one. These charts were created using monthly data; if yearly data were used, the concept would be even more pronounced.

Secular Bear Valuation Composite

In Figure 8.4, the current secular bear market valuation is shown in bold, with the other line representing the average of the previous four secular bears. Again, this type of analysis is just an observation and for educational purposes; you cannot make investment decisions from this. Investment decisions come from actionable information and analysis.

Secular Bull Valuation

Figure 8.5 of secular bull market valuations shows that most of them begin with PE ratios in the 5 to 10 (same as where secular bears end) and they end with PE ratios in the 20 to 30 range. The excessive secular bull of 1982 to 2000 reached unbelievable high valuations. I remember everyone saying that this time was different. Wrong!

Secular Bull Valuation Composite

 The secular bull market valuation composite is shown in Figure 8.6. It is the average of all the secular bull markets since 1900. Since we are currently in a secular bear market, the average of the secular bull markets is shown by itself.

Market Sectors

I use the sector definitions provided by Standard & Poor’s, of which there are 10. The other primary source for sector analysis is Dow Jones. Either is fine, I just prefer the S&P structure because I have been using it for so long. Table 8.1 shows the 10 sectors’ annual price performance since 1990, and Table 8.2 shows the relative performance of the total returns. When viewing a table of relative returns as in Table 8.2, keep in mind that each column (year) is completely independent of the preceding year or following year. Also, the relative ranking shows that those in the top part of the column outperformed those in the lower part of the column, independent of whether the returns were positive, negative, or a combination. Another value of this type of table is to show that picking last year’s top performer is not a good strategy. Remember, you cannot retire on relative returns.

This book does not get into the various uses of sectors as investments, but the book would not be complete without the mention of sector rotation and, in particular, how various sectors rotate in and out of favor based on the phase of the business cycle and the economy. A further delineation of sectors is their propensity to fall within the broad categories of offensive and defensive. This means that when the market is performing poorly, the defensive sectors will generally outperform, and when the market is performing well, it is the offensive sectors that are the top performers.

The phases of the economy known as economic expansions and contractions are affected by many events but generally boil down to recessions and periods of expansion. It should be noted, however, that not all contractions end up being recessions. The phases can then be broken down into early cycle, mid-cycle, and late cycle segments of the full cycle. There is a lot of literature available to cover all these details, but the point of this discussion is to show the rotational movement of the various sectors through the economic cycle.

Figure 8.7 is a graphic showing the sectors and where they fall in the cycle. It shows the rotation of sectors during an average economic cycle for the past 67 years and is courtesy of Sam Stovall, chief equity strategist, S&P Capital IQ. Sam wrote one of the best books on sector rotation years ago, Standard & Poor’s Sector Investing: How to Buy the Right Stock in the Right Industry at The Right Time, but is currently out of print as of 2013.

Another excellent study I have seen on the cycles within the phases and what sectors are affected was put out by Fidelity and dated August 23, 2010 (see Table 8.3). It clearly showed that, from 1963 through 2010, the following sectors were strongest during the various phases. In each cycle, the top-performing sectors are shown, with the first being the best of the four and the last being the worst of the top four, which is still the fourth best out of the 10 sectors.

It was interesting to note in this study that during all of the three cycles, Utilities and Healthcare were the two worst-performing of all 10 of the sectors (not shown). They only ranked in the top four during actual recessions. Since recessions are usually identified by the NBER about a year after they begin and sometime not until they have ended, this is not knowledge that you can make investment decisions with.

However, you can use a momentum analysis and always be in the top four sectors and probably do well. Clearly, this is certainly better than buy-and-hold or index investing.

Figure 8.8 shows the S&P 500 in the top plot and my Offensive-Defensive Measure in the lower plot. The concept of the Offensive-Defensive Measure is simple.

The Offensive Components

  • Consumer Discretionary
  • Financials
  • Industrials
  • Information Technology

The Defensive Components

  • Consumer Staples
  • Utilities
  • Healthcare
  • Telecom

You can see that the rally from the left side of the chart to point A (February, 2011) was strong; however, based on the switch from offensive to defensive sectors that occurred at point A, the investors were clearly concerned about the market. While the market traded sideways for months (see top plot), the defensive sectors were clearly in the lead, causing the offense-defense measure to decline. The measure declined significantly, and it wasn’t until point B (July 2011) that the market finally gave up and headed south.

Sector Rotation in 3D

Julius de Kempenaer has created a novel way of visualizing sector-rotation, or, more generally, “market-rotation,” in such a way that the relative position of all elements in a universe (sectors, asset classes, individual equities, etc.) can be analyzed in one single graph instead of having to browse through all possible combinations. This graphical representation is called a Relative Rotation Graph or RRG. As of 2013, Julius is now working together with Trevor Neil to further research and implement the use of RRGs in the investment process of investment companies, funds, and individual investors. More information can be found on their website

A Relative Rotation Graph takes two inputs that together combine into an RRG. I’ll use the S&P Sectors for this discussion. The first step is to come up with a measure of relative strength of a sector versus the S&P 500; this is done by taking a ratio between each sector and the S&P 500. Analyzing the slope and pace of these individual RS lines gives a pretty good clue about individual comparisons versus their benchmark. These raw RS lines answer “good” or “bad.” However, they do not answer “how good” or “how bad” or “best” and “worst.” The reason for this is that Raw RS values (sector/benchmark) for the various elements in the universe are like apples and oranges, as they cannot be compared based on their numerical value.

Taking the relative positions of all elements in a universe into account in a uniform way enables “ranking.” This process normalizes the various ratios in such a way that their values can be compared as apples to apples, not only against the benchmark but also against each other. The resulting numerical value is known as the JdK RS-Ratio—the higher the value, the better the relative strength. Additionally, not only the level of the ratio, but also the direction and the pace at which it is moving, affects the outcome. A concept similar to the well-known MACD indicator is used to measure the Rate of Change or Momentum of the JdK RS-Ratio line. Here also, it is important to maintain comparable values so another normalization algorithm is applied to the ROC; this line is known as the JdK RS-Momentum. The RRG now has JdK RS-Ratio for the abscissa (X axis) and the JdK RS-Momentum for the ordinate (Y axis). Graphically, the rotation looks like Figure 8.9.

In Figure 8.10, the sectors that are showing strong relative strength, which is still being pushed higher by strong momentum, will show up in the top-right quadrant. By default, the Rate of Change will start to flatten first, then begin to move down. When that happens, the sector moves into the bottom-right quadrant. Here, we find the sectors that are still showing positive relative strength, but with declining momentum. If this deterioration continues, the sector will move into the bottom-left quadrant. These are the sectors with negative relative strength, which is being pushed farther down by negative momentum. Once again, by default, the JdK RS-Momentum value will start to move up first, which will push the sector into the top-left quadrant. This where relative strength is still weak (i.e. < 100 on the JdK RS-Ratio axis) but its momentum is moving up. Finally, if the strength persists, the sector will be pushed into the top-right quadrant again, completing a full rotation.

The next step is to add the third dimension, time, to the plot to visualize the data on a periodic basis and in fact, somewhat like watching a flip chart or animation in which you can see the movement of each of the sectors around the chart as shown in Figure 8.10.

This technology, in static form, is available on the Bloomberg professional service since January 2011 as a native function (RRG<GO>) where users can set their desired universes, benchmarks, lookback periods, and so on. On their aforementioned website, Julius and Trevor maintain a number of RRGs, static and dynamic (animated rotation), on popular universes like the S&P 500 sectors (GICS I & II). Several professional as well as retail software vendors and websites are working to embed the RRG technology in their products, which should make this unique visualization tool available to a wider audience.

Asset Classes

Asset classes can be analyzed exactly the same as market sectors. The only limitation is that they are not tied as closely to economic cycles as sectors, so it is more difficult to identify those that are offensive or defensive. Table 8.4 shows the price performance of a multitude of asset classes. Remember, this table is only showing the annual performance of each asset for each year since 1990, while Table 8.5 has the asset classes ranked each year numerically. Normally, this type of table is shown with multiple colors, but somewhat difficult in a black-and-white book, so rankings are shown. Again, remember that the rankings only show the relative performance, and each year is totally independent of the preceding or following year.

The Lost Decade

Figure 8.11 shows the S&P 500 Total Return from December 31, 1998, to December 31, 2008. Two huge bear markets and two good bull markets. If you have a strategy that could capture a good portion of those bull markets and avoid a good portion of those bear markets, you would do really well. Buy and hold has lost money over this period.

I get asked all the time, “Are we going to have another bear market?” I answer that I can guarantee you that we will; I just have no idea when it will be. However, we can turn to another group of very bright people from the third-largest economy in the world (as of 2013) and look at their market. Figure 8.12 is the Japanese Nikkei from December 31, 1985, to December 31, 2011, a period of time of 26 years, over a quarter of a century.

Clearly, buy and hold was a devastating investment strategy, and the really bad news is that it still is. Figure 8.13 shows the up and down moves during this period, in which a good trend following strategy could have protected you from horrible devastation.

The percentage moves up are shown above the plot, and the percentage moves down are below the plot. These are the percentage moves for each of the up and downs you see on the chart. There were five cyclical bull moves of greater than 60 percent during this period. There were also five cyclical bear moves of greater than -40 percent. Remember, a 40 percent loss requires a gain of 66 percent just to get back to even. The small box in the lower right edge shows the decline from the market top in late December 1989 (–73.3 percent). A 73 percent decline requires a gain of 285 percent to get back even. Most people won’t live long enough for that to happen.

Finally, please notice that Figure 8.13 covers approximately 30 years of data and that the point on the right end (most recent value) is approximately equal to the starting point back in the mid-1980s; certainly the lost three decades. Buy and Hold is Buy and Hope.

Market Returns

It is always good to see how the markets have performed in the past. With the advent of the internet, globalization, minute-by-minute news, investors have a natural tendency to focus on the short term. Without a knowledge of the long-term performance of the markets, that short-term orientation can cause one to be totally out of touch with the reality that the market does not always go up. The following charts will show annualized returns for the S&P 500 price, total return, and inflation-adjusted total return over various periods. These types of charts are also known as rolling return charts. As an example, using the 10-year annualized rolling return, the data begins in 1928, so the first data point would not be until 1938 and be the 10-year annualized return from 1928 to 1938. The next data point would be for the 10-year period from 1929 to 1939, the third from 1930 to 1940, and so on.

Figure 8.14 shows the 1-year annualized return for the S&P price. It should be obvious that one-year returns are all over the place, oscillating between highs in the 40 percent to 50 percent range, and lows in the -15 percent to -25 percent range. Following Figure 8.14 are the 3-year (Figure 8.15), 5-year (Figure 8.16), 10-year (Figure 8.17), and 20-year (Figure 8.18) charts of annualized returns, with the average for all the data shown in the chart caption. Following the 20-year chart is a further analysis for the 20-year period.

The 10-year return chart now clearly shows up-and-down trends in the data (see Figure 8.17).

The 20-year rolling return chart (Figure 8.18) continues to reduce the short-term volatility in the chart, and the up-and-down trends become clear.

Since I adamantly believe that most investors have about 20 years to really put money away in a serious manner for retirement, the following two charts show returns over 20 years for total return (Figure 8.19) and inflation-adjusted total return (Figure 8.20).

For most analysis, the Price chart is more than adequate. In the world of finance, there is an almost universal demand for the Total Return chart; however, I think that if you are going to insist on Total Return, you should then also insist on Inflation-Adjusted Total Return. Using the three preceding 20-year charts and the averages shown, you can see that the average for Price is 6.97 percent, Total Return is 11.32 percent, and Inflation-Adjusted Total Return is 7.19 percent. What this says is that the effect of including dividends (Total Return) and the effect of Inflation often neutralize each other.

Table 8.6 shows the annualized returns for the S&P 500 for price, total return, and inflation-adjusted total return for the following periods: 1-year, 2-year, 3-year, 5-year, 10-year, and 20-year.

Table 8.7 shows the minimum and maximum returns, along with the range of returns, their mean, median, and variability about their mean (Standard Deviation).

Distribution of Returns

The range of return data is very easy to calculate because it is simply the difference between the largest and the smallest values in a data set. Thus, range, including any outliers, is the actual spread of data. Range equals the difference between highest and lowest observed values. However, a great deal of information is ignored when computing the range, because only the largest and smallest data values are considered. The range value of a data set is greatly influenced by the presence of just one unusually large or small value (outlier). The disadvantage of using range is that it does not measure the spread of most of the values—it only measures the spread between highest and lowest values. As a result, other measures are required in order to give a better picture of the data spread. The monthly returns for the S&P 500 begin with December 1927, so, as of December 2012, there are 1,020 months (85 years) of data.

Additional charts show the distribution of data in various ways using the 20-year annualized returns of the S&P 500 inflation-adjusted total return data for rolling 20-year periods. Twenty-year returns from the S&P 500 with 1,020 months of data would yield 778 data points. Return distributions can be thought of like this: Each bar represents the proportion of the returns that meet a percentage division of the data, mathematical division of the data, or statistical division of the data. The following are definitions of the various distribution methods, as shown in the title of the following figures.

  • Decile. One of 10 groups containing an equal number of the items that make up a frequency distribution. The range of returns is determined by the difference between the minimum and maximum returns in the series, then divided by 10 to create 10 equal groups.
  • Quartile. The calculation is similar to decile (above), but with only four groupings.

(Note: This use of decile and quartile does not follow the standard definition or calculation method often used in statistics.)

  • Standard deviation. A statistical measure of the amount by which a set of values differs from the arithmetical mean, equal to the square root of the mean of the differences’ squares. Figure 8.21 shows the percentage of the data that is included in a standard deviation. You can see that the mean is the peak and that 68.2 percent of the data is within one standard deviation from the mean, and 95.4 percent of the data is within two standard deviations of the mean.
  • Percentage. A proportion stated in terms of one-hundredths that is calculated by multiplying a fraction by 100.

Figure 8.22 shows the 20-year rolling returns using inflation-adjusted total return data distributed by quartiles. From the chart, you can see that 13.24 percent of the returns fall into the first quartile, or lowest 25 percent, of the data, 28.15 percent in the second, 32.90 percent in the third, and 25.71 percent in the fourth quartile or highest 25 percent of the data.

Figure 8.23 shows the same data, but in a decile distribution where each bar represents 10 percent of the number of data items. For example, 8.23 percent of the data fell in the highest 10 percent of the data.

Figure 8.24 shows the distribution of the data based on variance from the mean or standard deviation. You can see that the two middle bars each represent 34.1 percent of the data (68.2 percent total) that is one standard deviation from the mean. As an example, 33.68 percent of the 20-year rolling returns data was within one standard deviation above the mean of all the data. You can also surmise that the two bars on the right represent 50 percent of all the data and 53.86 percent (33.68 + 20.18) of the returns. Oversimplifying this, one then knows that there were more returns greater than the mean. However, there is an asymmetrical distribution between the returns that are outside of one standard deviation from the mean, with the larger percentage to the downside.

Figure 8.25 shows the 20-year rolling returns of the S&P 500 inflation-adjusted total return within percentage ranges. The bar on the left shows all the returns of less than 8 percent, which accounted for more than 50 percent of all returns (51.41 percent), while the bar on the right shows returns of greater than 12 percent, accounted for only 11.31 percent of all returns. The bar in the middle is the range of returns between 8 percent and 12 percent, which accounted for 37.28 percent of all returns. Recall the discussion in Chapter 4 on the deception of average, and once again the average 8 percent to 12 percent return is not average.

When the market starts to decline significantly, it is not the same as when someone yells “fire” in a theater. In a theater, everyone is running for the exits. In a big decline in the market, you can run for the exits, but first you have to find someone to replace you—you must find a buyer. Big difference! This chapter has attempted to stick to what I believe are market facts and essential information you should understand in regard to how markets work and have worked in the past. If one does not know market history, it would be very difficult to keep a focus on what the possibilities are in the future.

This concludes the first section of this book, where I have attempted to show you the many popular beliefs about the market that are used by academia and Wall Street to help sell their products. Part I also wraps up with what I believe to be truisms about the market. Part II has an introductory chapter on technical analysis and is followed by two chapters on extensive research into trend determination and risk/drawdowns.

Thanks for reading this far. I intend to publish one article in this series every week. Can’t wait? The book is for sale here.

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Stock rally, rate-cut forecasts face test from Powell testimony and jobs report

A four-month-long U.S. stock market rally, partly fueled by investors’ expectations for interest rate cuts in 2024 by the Federal Reserve, faces a test posed by pair of big events in the week ahead.

The first is Federal Reserve Chairman Jerome Powell’s semiannual testimony to Congress on Wednesday and Thursday, followed by Friday’s official jobs report for February.

Of the two, the nonfarm payrolls data has the potential to move markets more, given what it could signal about the risk that inflation may keep running hot if job gains come in above the 190,000 consensus expectation, according to analysts and investors.

“Inflation has bottomed out, but is still above the Fed’s objective and it seems like more labor-market weakness is going to be needed,” said John Luke Tyner, a portfolio manager at Alabama-based Aptus Capital Advisors, which manages $5.5 billion in assets. “The headlines we’ve been seeing on technology-related layoffs are missing the mark because there’s a resurgence of employment and wage growth in Middle America.”

January’s data proves the point. The month of February began with the release of January nonfarm payrolls, which showed 353,000 jobs created and a sharp 0.6% rise in average hourly earnings for all employees, despite the highest interest rates in more than two decades.

Then came a round of inflation data. Consumer- and producer-price readings were both above expectations for January, followed by last Thursday’s release of the Fed’s preferred inflation measure, known as the PCE, which showed the monthly pace of underlying price gains rising at the fastest pace in almost a year. Meanwhile, personal income grew at a monthly rate of 1% in January.

Fed-funds futures traders have since pared back their expectations for as many as six or seven quarter-percentage point rate cuts by December, and moved closer in line with the three reductions that the Fed signaled would likely be appropriate. However, this has still been enough to hand the Dow Jones Industrial Average
and S&P 500
their best start to a year since 2019, and fueled a four-month rally in all three major indexes. For the week, the S&P 500 rose 1% and the Nasdaq Composite gained 1.7%, but the Dow Jones slipped 0.1%, based on FactSet data.

Broadly speaking, Powell is expected to stick to his script by emphasizing the need for greater confidence that inflation is falling toward the Fed’s 2% objective, before policymakers can cut the fed-funds rate target from its current range of 5.25% to 5.5%, analysts said. He’s seen as loath to say anything just yet that could move markets or rate expectations.

“Powell needs to avoid doing what he did in November and December, which was to juice the market with a very bullish message suggesting that policymakers might be done with hiking rates and that the next moves would be rate cuts,” Tyner said via phone. “The Fed needs to remain unified about the need to be patient, with no rush to cut rates, and about being data dependent, with the current data pointing toward not cutting until later this year.”

Read: No Fed rate cuts in 2024, Wall Street economist warns investors

Aptus Capital’s strategies rely on the use of options overlays to improve results, and the firm is “well-positioned” to capture both upside and downside moves in the market because of a “disciplined approach on hedges in both directions,” the portfolio manager said.

Others see some possibility that Powell’s testimony to the House Financial Services Committee and Senate Banking Committee produces one of two non-base-case results: He could either push back on expectations around the timing or extent of Fed rate cuts this year, or, on the flip side, hint at the need for maintenance rate cuts because of prospects for softer inflation and economic readings going forward.

The rates market is the mechanism by which financial markets would likely react one way or another to Powell’s testimony and Friday’s nonfarm payrolls report — specifically with trading in fed-funds futures and Secured Overnight Financing Rate futures. Any reaction in the futures market would simultaneously impact longer-term Treasurys and risk assets, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets.

Fed officials are not likely to have enough confidence that they’ve won the battle against inflation by June, raising the question of whether markets are overestimating policymakers’ ability to start cutting rates by that month, Sanders said via phone.

“Fed officials are more or less committed to cutting rates when appropriate, but are concerned that if they cut too soon they’ll have sticky inflation,” he said.

“The services side continues to be higher than the Fed wants, with much of the disinflation coming from the goods side,” Sanders said. Inflation dynamics are “still not in balance from the Fed’s perspective, and the services side has to be concerning to policymakers, especially in the face of the personal-income growth we’ve seen. It’s going to be status quo until the Fed knows whether the higher inflation prints seen in January were a one-off or if this continues.’’

Analysts said they are particularly worried about supercore inflation, a measure of core services that excludes housing, which is still running at levels which suggest that the services side of the U.S. economy is firing on all cylinders.

No major U.S. data is scheduled for release on Monday. Tuesday brings January factory orders and ISM service sector activity figures for February.

On Wednesday, data releases include ADP’s private-sector employment report, January readings on wholesale inventories and job openings, and the Fed’s Beige Book report. San Francisco Fed President Mary Daly is also set to speak that day.

Thursday’s data batch includes weekly initial jobless benefit claims, a revision on fourth-quarter productivity, the U.S. trade balance, and consumer-credit figures. Cleveland Fed President Loretta Mester is also scheduled to make an appearance. Friday brings an appearance by New York Fed President John Williams and final consumer-sentiment data for February.

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Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

Stock-market investors may take their cues from a series of important events in the week ahead, including the Federal Reserve’s monetary-policy meeting, a closely-watched December employment report and an onslaught of earnings from megacap technology names, which all promise insight into the state of the economy and interest-rate outlook. 

The benchmark S&P 500 index
Thursday closed at a record high for five straight trading days, the longest streak of its kind since November 2021. The index finished slightly lower on Friday, but clinched weekly gains of 1.1%, while the Nasdaq Composite
advanced 1% and the blue-chip Dow Jones Industrial Average
gained 0.7% for the week, according to Dow Jones Market Data.

“What we’re seeing is the market participants are still playing catch-up from 2023, putting money on the sidelines to work,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.

“Wall Street is still back at it trying to eke out gains as quickly as possible, so it’s very short-term oriented until we get big market-moving events,” he said, adding that one of the events could well be “a disappointing Fed speech.”

Fed’s Powell has good reasons to push back on rate cuts

Expectations that the Fed would begin easing monetary policy as early as March after its fastest tightening cycle in four decades have helped fuel a rally in U.S. stock- and bond-markets. Investors now mostly expect five or six quarter-point rate cuts by December, bringing the fed-funds rate down to around 4-4.25% from the current range of 5.25-5.5%, according to the CME FedWatch Tool. 

See: Economic growth underlined by fourth-quarter GDP reinforces Fed’s cautious approach to rate cuts

While no interest-rate change is expected for the central bank’s first policy meeting this year, some market analysts think comments from Fed Chair Jerome Powell during his news conference on Wednesday are likely to shift the market’s expectations and push back against forecasts of a March cut. 

Thierry Wizman, global FX and interest rates strategist at Macquarie, said a stock-market rally, “too-dovish” signals from the Fed’s December meeting, a still-resilient labor market and escalating Middle East conflicts may indicate that Powell has to keep the “[monetary] tightening bias” next week. 

The rally in the stock market could “conceivably backfire” by virtue of a loosening of financial conditions, while the labor market has not weakened to the extent that the Fed officials would have hoped, Wizman told MarketWatch in a phone interview on Friday.

Further complicating things, fears that inflation could spike again in light of the conflict in the Middle East and Red Sea could reinforce Fed’s cautious approach to rate cuts, he said. 

See: Oil traders aren’t panicking over Middle East shipping attacks. Here’s why.

Meanwhile, a shift to “neutral bias” doesn’t automatically mean that the Fed will cut the policy rate soon since the Fed still needs to go to “easing bias” before actually trimming rates, Wizman said. “I think the market gets too dovish and does not realize the Fed has very, very good reasons to push this [the first rate cut] out to June.” 

Markets are ‘laser-focused’ on January employment report

Labor-market data could also sway U.S. financial markets in the week ahead, serving as the “big swing factor” for the economy, said Patrick Ryan, head of multi-asset solutions at Madison Investments. 

Investors have been looking for clear signs of a slowing labor market that could prompt the central bank to start cutting rates as early as March. That bet may be tested as soon as Friday with the release of nonfarm payroll data for January.

Economists polled by The Wall Street Journal estimate that U.S. employers added 180,000 jobs in January, down from a surprisingly strong 216,000 in the final month of 2023. The unemployment rate is expected to tick up to 3.8% from 3.7% in the prior month, keeping it near a half century low. Wage gains are forecast to cool a bit to 0.3% in January after a solid 0.4% gain in December. 

“That’s going to have everyone laser-focused,” Ryan told MarketWatch via phone on Thursday. “Anything that shows you real weakness in the labor market is going to question if the equity market is willing to trade at 20 plus times (earnings) this year.” The S&P 500 is trading at 20.2 times earnings as of Friday afternoon, according to FactSet data. 

Six of ‘Magnificent 7’ may continue to drive S&P 500 earnings higher

This coming week is also packed with earnings from some of the big tech names that have fueled the stock-market rally since last year. 

Five of the so-called Magnificent 7 technology companies will provide earnings starting from next Tuesday when Alphabet Inc.

and Microsoft Corp.

take center stage, followed by results from Apple Inc.

and Meta Platforms

on Thursday. 

Of the remaining two members of the “Magnificent 7,” Tesla Inc.

has reported earlier this week with its results “massively disappointing” Wall Street, while Nvidia Corp.’s

results will be coming out at the end of February.

See: Here’s why Nvidia, Microsoft and other ‘Magnificent Seven’ stocks are back on top in 2024

A number of the companies in the “Magnificent 7” have seen their stock prices hit record-high levels in recent weeks, which could help to drive the value of the S&P 500 higher, said John Butters, senior earnings analyst at FactSet Research. He also said these stocks are projected to drive earnings higher for the benchmark index in the fourth quarter of 2023.

In One Chart: Tech leads stock market’s January rally by wide margin. Watch out for February.

In aggregate, Nvidia, Alphabet,, Apple, Meta Platforms, and Microsoft are expected to report year-over-year earnings growth of 53.7% for the fourth quarter of last year, while excluding these six companies, the blended earnings decline for the remaining 494 companies in the S&P 500 would be 10.5%, Butters wrote in a Friday client note.

“Overall, the blended earnings decline for the entire S&P 500 for Q4 2023 is 1.4%,” he said. 

Check out! On Watch by MarketWatch, a weekly podcast about the financial news we’re all watching — and how that’s affecting the economy and your wallet. MarketWatch’s Jeremy Owens trains his eye on what’s driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.  

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The Magnificent 7 dominated 2023. Will the rest of the stock market soar in 2024?

2023 will go down in history for the start of a new bull market, albeit a strange one.

Despite some year-end catch-up by the rest of the S&P 500 index, megacap technology stocks, characterized by the so-called Magnificent Seven, have dominated gains for the large-cap benchmark
which is up 23.8% for the year through Friday’s close.

That’s the result of “extreme speculation,” according to Richard Bernstein, CEO and chief investment officer of eponymously named Richard Bernstein Advisors. And it sets the stage for investors to take advantage of “once-in-a-generation” investment opportunities, he argued, in a phone interview with MarketWatch.

MarketWatch’s Philip van Doorn last week noted that, weighting the Magnificent Seven — Apple Inc.

 , Microsoft Corp.
, Inc.
 Nvidia Corp.
 Alphabet Inc.

 Tesla Inc.
 and Meta Platforms Inc. 

— by their market capitalizations at the end of last year, the group had contributed 58% of this year’s roughly 26% total return for the S&P 500, and that’s down from a breathtaking 67% at the end of November.

The chart below shows that the percentage of stocks in the S&P 500 that have outperformed the index in the year to date remains well below the median of 49% stretching back to 1990:

Richard Bernstein Advisors

Meanwhile, the tech-heavy Nasdaq Composite
has soared more than 40% this year, while the more cyclically weighted Dow Jones Industrial Average
which hit a string of records this month, is up 12.8%.

The narrowness of the rally gave some technical analysts pause over the course of the year. They warned that that it was uncharacteristic of early bull markets, which typically see broader leadership amid growing confidence in the economic outlook.

Bernstein, previously chief investment strategist at Merrill Lynch, sees parallels with the late-1990s tech bubble, which holds lessons for investors now.

The market performance indicates investors have convinced themselves there are only “seven growth stories,” he said. It’s the sort of myopia that’s characteristic of bubbles.

The consequences can be dire. In the 1990s, investors focused on the economy-changing potential of the Internet. And while those technological advances were indeed economy-changing, an investor who bought the tech-heavy Nasdaq at the peak of the bubble had to wait 14 years to get back to break-even, Bernstein noted.

Today, investors are focused on the economy-changing potential of artificial intelligence, while looking past other important developments, including reshoring of supply chains.

“I don’t think anyone is arguing AI won’t be an economy-changing technology,” he said, “ the question is, what’s the investing opportunity.”

For his part, Bernstein argues that small-cap stocks; cyclicals, or equities more sensitive to the economic cycle; industrials; and non-U.S. stocks are all among assets poised to play catch-up.

“I don’t think one has to be overly sexy on this one…it may not make a huge difference as to how you decide to execute and invest” in those areas, he said. “There’s a bazillion different ways to play this.”

Those areas are showing signs of life in December. The Russell 2000
the small-cap benchmark, has surged more than 12% in December versus a 4.1% advance for the S&P 500. The Russell still lags behind by a wide margin year to date, up 15.5%, or more than 8 percentage points behind the S&P 500.

Meanwhile, an equal-weighted version of the S&P 500
which incorporates the performance of each member stock equally instead of granting a heavier weight to more valuable companies, has also played catchup, rising 6.2% in December. It’s now up 11% in 2023, still lagging behind the cap-weighted S&P 500 by more than 8 percentage points.

Bernstein sees early signs of broadening out, but expects it to be an “iterative process.” What investors should be aiming for, he said, is “maximum diversification,” in direct contrast to 2023’s historically narrow market, which reflects investors rejecting the benefits of diversification and taking more concentrated positions in fewer stocks.

To be sure, while the Magnificent Seven-dominated stock-market rally has attracted plenty of attention, it doesn’t mean those individual stocks have been the sole winners in 2023.

“I will say, ‘magnificent’ is in the eye of the beholder,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview.

The seven stocks that account for such a large share of the S&P 500’s gains do so mostly due to their extremely “mega” market caps rather than outsize price gains. And that’s just, by definition, how market-cap-weighted indexes work, analysts note.

That doesn’t mean the megacap stocks are necessarily the best performers over 2023. While Nvidia, up 243%, and Meta, up 194%, top the list of year-to-date price gainers in the S&P 500, Apple Inc.

is only the 59th best performing stock, with a 49% gain. Combine that with a $3 trillion market cap, however, and Apple proves one of the biggest movers of the overall index.

What was bizarre about the 2023 rally wasn’t so much the megacap tech performance, Gordon said, but the fact that the rest of the market languished to such a degree until recently.

Clarity around the economic outlook and interest rates help clear the way for the rest of the market to play catch-up, he said. Fears of a hard economic landing have faded, while the Federal Reserve has signaled its likely finished raising rates and is on track to deliver rate cuts in 2024.

For stock pickers that didn’t latch on to the few winners, 2023 was brutal. Passive investors who just bought S&P 500-tracking ETFs should feel good.

So why not just chase the index? Bernstein argues that could spell trouble if the megacap names are due to falter. That could make for a mirror image of this year where gains for a wider array of individual stocks is offset by sluggish megacap performance.

Gordon, however, played down the prospect of “binary outcomes” in which investors sell megacaps and buy the rest of the market.

If troubled segments of the economy, such as the housing sector, recover in 2024, investors “could definitely see a scenario where the rest of the market catches up but it doesn’t have to be at the expense of highfliers,” he said.

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The Top Five Charts of 2023



  • 2023 was dominated by mega cap growth stocks, but the fourth quarter saw a potential change as other sectors experienced renewed vigor.
  • Three breadth indicators provided great clarity to the up and down cycles over the course of the year, as extreme readings tended to coincide with major turning points.
  • Interest rates remain top of mind as a pullback in the Ten Year Treasury Yield certainly seemed to provide support to the recent rally for stocks.

The end of the year provides a natural opportunity to look back and reflect on what we learned over the last 12 months as investors. I very much enjoyed thinking about how to tell the story of this market in just five charts, and to be completely honest, the videos below include way more than that!

But as much we love to make things more complicated for ourselves, mindful investors know that simple is often the best approach. So, by boiling down this year into five major themes and using these charts as a starting point to a deeper analysis of each, I found it to be a rewarding and at times eye-opening experience.

You can access the full playlist of the Top Five Charts on our YouTube channel, and you are welcome to ChartList I used during the videos, which you can find right HERE!

Without further ado, here are the five charts I selected, along with descriptions and video links. I hope you can use these as inspiration for your own year-end process and performance review!

Chart #1: S&P 500

As Ralph Acampora told me years ago, “Always start with a simple chart of the S&P 500.” And it’s been a fascinating year to do so, with each quarter providing a unique experience for investors, including plenty of ups and downs.

Looking back, I’m struck by what a sideways market we experienced really through the end of May. The S&P started with a strong January, but subsequent months basically brought retests of previous highs and previous lows, and no real indication of bullishness or bearishness on the larger timeframe.

June’s breakout provided a perfect example of the bearish momentum divergence, as negative momentum into the July high indicated an exhaustion of buyers. I also find myself focusing in on the October low, which caused me to be quite bearish at the time. That was definitely one of my key lessons learned in 2023, especially the importance of recognizing a clear change of character in November.

Chart #2: Ten Year Treasury Yield

Back in January 2023, I was asked during an interview to identify the most important chart to watch in 2023. I answered this chart, the Ten Year Treasury Yield ($TNX), along with the value vs. growth ratio. My thesis was that many investors had not experienced a rising rate environment (including me!), so this could mean some painful lessons as value outperformed growth as interest rates pushed higher.

As the chart clearly shows, the Ten Year Yield going from around 4% to 5%, completing a long journey from almost zero rates not long ago, did not provide the tailwind for value stocks that I expected. What a beautiful testament to the benefits of including macroeconomic analysis as part of a holistic investment approach, but also the importance of focusing on the evidence of price itself. If the charts say growth is outperforming, I’m going to want to stick with growth until proven otherwise.

Chart #3: Market Breadth

Breadth analysis is an essential component to my analytical process, as it addresses the issues related to our growth-oriented benchmarks being dominated by a small number of mega-cap stocks.

This chart includes three different breadth indicators: the S&P 500 Bullish Percent Index, the Percent of Stocks Above the 50-day Moving Average, and the McClellan Oscillator. With the first two indicators at 80% and 90%, respectively, this suggests a potential exhaustion point to the current upswing, similar to what we observed in July 2023, November 2022, and August 2022.

Chart #4: Leadership Themes

I have been thinking of 2023 as the year of mega-cap growth, but this fourth chart that it actually wasn’t about growth over value, but rather large over small. Reviewing the nine Morningstar style boxes, it’s clear that, while growth did indeed outperform value, it was overall more of large vs. small story.

Large-cap growth has outperformed large-cap value by almost 900 basis points (nine percent), but has outperformed mid-cap and small-cap style boxes by around 1300 basis points. Our benchmarks have been powering higher, propelled by the strength of large-cap growth, and one of the most important questions for 2024 will be whether this stretch of domination will continue.

Chart #5: Bitcoin

Higher highs and higher lows make an uptrend. And while Bitcoin ($BTCUSD) did not show that general pattern in the middle of 2023, it started the year strong and certainly ended the year in a position of strength.

Bitcoin has nearly tripled in value since December 2022, starting with a significant rally into an April high. But from March through October, Bitcoin basically was rangebound between 25,000 and 31,000. I remember laying out a game plan, which involved following the price momentum fueling any exit from that range. Sure enough, in October, we witnessed an upside breakout inspired by renewed optimism for a potential announcement confirming new spot Bitcoin ETFs. While that news has not yet arrived, the bullish uptrend shows that investors remain eager for this huge potential catalyst.

During my years in the Fidelity Chart Room, I was often reminded that charts can tell the best stories about market history. And as each new year concludes, the charts can provide a fantastic report card for your performance, a history textbook filled with practical lessons for years to come, and a reminder of the value of technical analysis in helping us identify opportunities and manage risk.

I hope these discussions inspire you to have a thorough review session as we wrap 2023, and an honest assessment of how you can improve your investing toolkit in 2024.

Happy holidays, thank you for making StockCharts a part of your process, and I’ll look forward to more great charts and conversations in the new year!



P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

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Why the Santa Rally Stumbled; QQQ Sets Up for Big Move, Be Careful

Next week could make or break the Santa rally.

The Fed meets on 12/12 and 13, and CPI and PPI are due out simultaneously. As a result, it wouldn’t a bad idea to review portfolios carefully, to consider taking some profits and to game out some potential ways to hedge. Still, the Nasdaq 100 Index (NDX) is forecasting a large, and potentially bullish move soon. Given the bullish seasonal trends, further upside is not out of the question.

This is especially notable given the recent liquidity scare and serendipitous recovery in the financial system, which I describe directly below. Let’s start by looking at the price chart for the Invesco QQQ Trust (QQQ).

Cutting to the chase, the Bollinger Bands are tightening around QQQ’s prices. That’s a sign, as I detailed here, that a big move is coming. Moreover, money flows, as indicated by Accumulation/Distribution (ADI) and On Balance Volume (OBV) are perking up. A move in QQQ above $394 would likely trigger a whole lot of algo trading programs queued up to trade breakouts.

Why the Santa Rally Stumbled Last Week

Stock traders who have profited from the October 2023 bottom should be thanking the bond market for their good fortune, which means that any major reversal in bond yields will likely be followed by what could be a major selloff in stocks. On the other hand, as can only happen in the strange world known as Wall Street, the recent rally in bonds nearly pulled the plug on the entire financial system on December 1.

In fact, the recent hiccup in the Santa Claus rally, from which the market has largely recovered, may have resulted from a reduction in the financial system’s liquidity brought about by, wait for it, the rally in bonds. According to reports, the speed with which the bond rally developed put a squeeze on Wall Street’s money lending machine (the repo market), whose money powder keg was squeezed by the Fed’s QT maneuvers, which led to the huge backup in bond yields.

The whole thing is so bizarre that it took me several reviews of multiple sources to put it together. But here is the simplified version. The Fed’s “higher for longer” mantra and its QT (removal of liquidity from the system), via the sale of treasury bonds, drained Wall Street’s piggy bank for borrowed money, leaving it with less funds than would normally be required further finance the rally in stocks and bonds.

Translation: we had a mini liquidity crisis as Wall Street ran out of money to lend for a couple of days. Stay with me, please. You just can’t make this stuff up.

When the U.S. Treasury Note yield (TNX) was rising to 5% (May to October 2023), spurred by the Fed’s QT and the panicked sellers who joined them in selling bonds, it squeezed the liquidity in the financial system. Thus, even though there was plenty of interest in buying stocks and bonds when sentiment turned, there wasn’t enough reserve money available in Wall Street’s loan machine to lend to hungry traders – the proverbial air pocket.

The visual evidence for the hiccup was the December 1, 2023 bump in the Secured Overnight Trading Rate (SOFR), which is best seen in the Zoom thumbnail to the right of the price chart.

As a result, those who got caught off guard and who ended up playing catchup after they missed the rally in stocks and bonds, which I predicted here way back in October, suddenly found themselves with limited supplies of money to borrow in order to trade the reversal. SOFR is back in sync with the Fed Funds rate now. But yeah, that was an interesting development for sure.

Bond Yields Pause, Mortgages Continue Bullish Decline

So where are we now? SOFR seems to be back in sync with the Fed Funds rate, which is why the stock market has resumed its rally. On the other hand, the U.S. Ten Year Note yield (TNX) has come a long way in a short period of time, which means we can expect it to back up some in the short term.

Indeed, a pause in TNX’s decline could last for the next couple of weeks as the CPI and PPI numbers are released and the Fed meets on December 12-13. Keep an eye on the 4.25-4.4% yield range, as any move above that key zone could trip some algo-selling in stocks and bonds.

Mortgage rates have dropped. A breach below 7% on the average mortgage could well take mortgages to 6.8%, where they will test the 50-day moving average for this series.

Consequently, homebuilder stocks, as in the SPDR S&P Homebuilders ETF (XHB), have broken out to new highs, spurred by the bullish beat of earnings expectations and outlook from Toll Brothers (TOL), which I own and recommended in October, 30% below the 12/2/23 closing price.

The long-term fundamentals of supply and demand remain in favor of the homebuilders and related sectors. For the next move in the homebuilders and other important market sectors, join the smart money at Joe Duarte in the Money FREE with a two-week trial subscription.

For more on homebuilder stocks and real estate stock analysis, click here.   

Interesting Emerging Sectors

Lately, I’ve focused on value investing, as I did in my recent Your Daily Five video, which you can catch here. As it happens, the trend seems to be expanding into sectors which are well off the radar for many investors. Comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index, you can see the dynamic playing out.

One of the most unlikely areas of the market which has benefited from the value trend is the transport sector, where the difficulties being faced by trucking companies are gathering the headlines, but other subsectors are reaping the rewards.

You can see this in the action for the SPDR S&P Transportation ETF (XTN), which has quietly crossed above its 200-day moving average and which looks poised to make a run at its old highs near the high 80s, barring negative developments.

Market Breadth Recovers Post-Liquidity Squeeze

The NYSE Advance Decline line (NYAD) remains in bullish territory, trading above its 50- and 200-day moving averages. This may be slowed in the short-term, as the RSI indicator is nearing an overbought level. But even with a slower rate of climb than NYAD’s, the market’s breadth is holding up.

The Nasdaq 100 Index (NDX) is inching above 16,000. And with the Bollinger Bands starting to squeeze around prices, it looks as if a big move is just around the corner. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and looks poised to move above 4600. This is not surprising, as many value stocks continue to push SPX higher.

VIX Remains Below 20

The CBOE Volatility Index (VIX) remained below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit

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With the Fed on Hold, Santa Just Revved Up the Sled; Think Value

The Santa Claus rally has left the station and is barreling down the tracks, as the Federal Reserve is on hold. 

Before I took a week off from writing this column for the Thanksgiving holiday, I wrote: “Regular readers of this column were not surprised by the rally, given the multiple alerts I posted noting the likelihood of a meaningful market bottom emerging due to the extraordinary technical picture which had developed in the bond market, and the ensuing gloom and doom in stocks as early as September 2023. And although there are no guarantees, the ongoing rally in both stocks and bonds has a great chance of continuing, due to the bullish seasonality which kicks into high gear with the traditional Thanksgiving rally.”

Here’s why we’re rallying. At least three voting members of the FOMC, including Chairman Powell, have made the following clear:

  • No easing in in the cards for now;
  • The Fed is prepared to tighten further if needed; but
  • Unless inflation data worsens, the interest rate hiking cycle is likely over.

All of which adds up to stocks moving higher in the short term, unless something bad happens that derails the bullish sentiment; think CPI, PPI, and the FOMC meeting, which are all approaching. Moreover, there is some evidence that overbought sectors of the market, such as technology, are starting to struggle, which means that some sort of sector rotation is well overdue.

So far, so good; but what’s next?

Bond Yields and Mortgages Continue Bullish Decline

The first part of the answer to the above question lies in the bond market, where rates continue to fall and seem headed lower at a rapid clip. The U.S. Ten Year Note yield (TNX) is now well below 4.5% and its 50-day moving average. Moreover, it just broke below the 4.3%-4.4% support area, and looks headed for 4%.

Even more impressive is the move down in mortgage rates (MORTGAGE), which looks set to test the 7% area and may move as low as 6.8%, the 50-day moving average for this series.

As expected, amongst the major beneficiaries of the lower interest rates have been the homebuilders, as reflected in the recent price action for the SPDR S&P Homebuilders ETF (XHB), which broke out to a new high on the latest decline in TNX.

In addition, the long-term fundamentals of supply and demand in the housing market remain in favor of the homebuilders and related sectors. These include real estate investment trusts (REITs), which specialize in home rentals and related businesses.

You can see the bullish influence of lower interest rates on Nuveen Short Term REIT ETF (NURE) which is now testing its 200-day moving average. This ETF specializes in rental properties. A move above $30 in REZ is likely to deliver higher prices.

Sector Rotation is Likely

The REIT sector is certainly a place where value investors can find excellent ways to put money to work. But it’s not the only area that has been overlooked by the market lately, and which should benefit from a sector rotation.

Over the last few weeks in this space, I’ve been focusing on value investing, a topic in which I recently expanded in my latest Your Daily Five video, which you can catch here. That’s because growth stocks have become overbought and are due for a pause, while there are still plenty of investors and money managers who missed the October bottom and are being forced to play catchup before the year ends.

You can see this dynamic playing out by comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index.

The growth index has been trading ahead of the value index for the past several weeks, but is now struggling near the 15800 chart point. Meanwhile, the value index has extended its move with greater momentum. You can appreciate the differences in the strengths of the move via the Pure Price Momentum indicators (PMO) for both where the PMO for SPXPV is much stronger.

All of this suggests that the next leg up in the market, barring something bad happening, will likely be led by value stocks.

For more on homebuilder stocks, click here.

The Unloved Energy Sector

After the amazing summer rally in the oil markets, things have cooled off dramatically. At the center of the decline in crude and the fossil fuel sector has been an oversupply of product. On the one hand, higher well efficiency in the U.S. shale sector has increased supply. On the other hand, as usual, OPEC + has not fully stuck to its highly publicized production cuts.

Yet the recent collapse in the clean energy stocks puts a different emphasis on the traditional energy sector, which is why it’s worth looking at the action in the Energy Select Sector SPDR Fund (XLE), where big oil and gas companies are aggregated.

What stands out the most is that even as crude oil prices (WTIC) have come well off their recent top, XLE’s decline has been a lot gentler. In fact, XLE is still trading above its 200-day moving average, which puts it technically in a bullish trend. In addition, the ETF is starting to show signs of moving away (to the upside) from a large VBP bar near $85. Above, there is more resistance from the 50-day moving average and a cluster of VBP bars all the way to $89.

Nevertheless, with components such as BP Plc (BP) trading at seven times earnings while yielding 4.81%, you have to wonder how long before value investors come a-knocking at the door of this sector.

Aside from recommending multiple big winners in the homebuilder and technology sectors, I recently recommended an energy stock which likely to move decidedly higher regardless of what the price of oil does. Join the smart money at Joe Duarte in the Money, where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two week trial subscription

Market Breadth is Now Bullish

The NYSE Advance Decline line (NYAD) is back in bullish territory, coursing above its 50- and 200-day moving averages. So, while there is improvement, we don’t have a definitively bullish long-term signal for the market’s trend, yet. If there is a downside, it’s that the RSI indicator is nearing an overbought situation. However, at this stage of the rally, NYAD’s rate of climb may slow, but does not look as if it will fully reverse in the short term.

The Nasdaq 100 Index (NDX) looks a bit tired and needs a rest. The index has struggled to move above 16,000. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and could well move above 4600. This is not surprising, as many value stocks are now pushing SPX higher.

VIX is Back Below 20

The CBOE Volatility Index (VIX) continues to fall, closing below 15 last week. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit

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