Category: Newsletter

Last week, we discussed the impact of the Trump Presidency on the financial markets based on expectations of tax cuts, tariffs, and deregulation. Since then, the "Trump Trade" went into full swing, pushing the markets higher; however, as we noted, that the trading had gotten a bit ahead of itself, and we saw some consolidation and profit-taking that reverted the market to the 20-DMA. Such is unsurprising given the overbought conditions with a more extreme deviation from the 50-DMA. However, the market recovered somewhat this past week, with buyers entering and reversing early morning market declines.

While there are some short-term technical concerns, as discussed in "Seasonality: Buy Signals And Outcomes," there are three primary reasons to remain optimistic into year-end:

With the election over and the Federal Reserve cutting the overnight lending rate by another 25bps, many of the headwinds the market was hedging for are now behind us. As a result, the market surged higher, hitting our year-end target of 6000 on Friday. Furthermore, since election day, the "RE-risking" rally reversed the short-term sell signal, supporting higher prices. As we stated over the last few weeks, despite the many media-driven narratives, the underpinnings of the market remained bullish, suggesting the recent pullback to the 50-DMA was a buying opportunity.

On Thursday, the market cracked the 20-DMA and swiftly fell to retest the 50-DMA. There is an important lesson in this week's action. Over the last several weeks, we have warned about the weakening of momentum and relative strength and the triggering of the MACD "sell signal." However, many followers commented that the market kept rising despite my warnings and "this time was different." The lesson is that while technical analysis is NOT perfect, the signals derived from the analysis are often a good process to follow. As always, "timing" is the most difficult challenge. The indicators told us that the market would likely "derisk" before the election, which is now evident.

Unsurprisingly, the market stumbled a bit this past week, breaking the "rising wedge" pattern to the downside. While the correction has been mild, with the election looming, some further consolidation or reversal as portfolio managers "derisk" for election risk should be expected. However, the market continues to find buyers at the 20-DMA as portfolio managers are unwilling to be "out of the market" currently.

The chart below is the WEEKLY S&P 500 chart, with three different signals to confirm the start of the seasonal period. With Friday’s close in the green, keeping the week broadly positive, all three seasonal buy signals have been triggered.

On top of a strong job report, the latest CPI reading reduced market hopes of a more aggressive rate-cutting cycle. In September, CPI rose 0.2% versus a 0.1% expectation, bringing the annual inflation rate to 2.4%, which was also higher than the expectation of 2.3%. Notably, Core CPI rose 0.3% versus a 0.2% expectation.

On Friday, the latest employment report from the Bureau of Labor Statistics (BLS) quelled any concerns of a near-term recession. While overall employment printed an astonishing 245,000 jobs, a massive chunk of those jobs were from Government hiring and seasonal adjustments.

Notably, completing the "cup and handle" pattern suggests a potential further upside to 6000 by year-end. While that target may seem ambitious, it aligns with recent Wall Street upgrades.