Inside This Week’s Bull Bear Report
- Bullish Win Streaks Are Not Sustainable
- How We Are Trading It
- Research Report –Bastiat And The Broken Window Fallacy
- Youtube – Before The Bell
- Market Statistics
- Stock Screens
- Portfolio Trades This Week
A Small Pullback
Last week, we discussed the triggering of the weekly seasonal MACD buy signal. To wit:
“The WEEKLY S&P 500 chart, with three different signals, confirms 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. However, just because the seasonally strong period of the year has technically started, it doesn’t mean that the markets won’t have corrections along the way. Notably, we have already had 6-straight weeks of gains, which is a long stretch without a pullback. Secondly, while the market is on a weekly “buy signal,” the market is both deviated and overbought short-term. When the market breadth is very elevated, combined with overbought and deviated markets from the 50 and 200-DMA, corrections and consolidations tend to be more prevalent.”
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.
Notably, the market rallied to the underside of the rising trend line but failed at that resistance level. While the moving averages will provide some short-term support, we must remember that the negative divergence in relative strength and momentum remains.
As noted, there is currently little risk of a bigger near-term correction. However, some things could cause one, like a highly contested election. In the current political environment, such is not a low-probability event. As such, while we remain allocated to the markets, we are closely monitoring the amount of risk we take.
This week, we will discuss why we maintain the S&P 500 index’s year-end 6000 target and how to navigate the market into year-end.
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An Impressive Win Streak For The Market
“Lance, you are always talking about taking profits and rebalancing risk but you are continually wrong. This market is going higher and you are missing out.” – Ray
This is not my first time receiving such messages, and Ray is correct. The market continues to rise, and even intraday corrections, when they occur, are short-lived. As in Tuesday’s Daily Market Commentary:
“Most crucially, the market has been up six weeks in a row, which historically is a very long stretch without a correction.”
While that win streak ended this past week, the market continues to boast impressive upside performance.
Sentiment Trader made a keen observation recently:
“The S&P 500 has closed 242 consecutive sessions above its 200-day moving average. While nothing is critical about this particular number of days, it just happened to be an observation I made over the weekend: consistent momentum of this type has historically led to further upside in the world’s most benchmarked index. The previous signal occurred in June 2021, and the S&P 500 gained 10.7% over six months.
The S&P 500 delivers an annualized return of 9.8% when the win streak count surpasses 242 sessions. Conversely, when the streak resides below 242 days, the index yields an annualized return of 8.1%.”
We are now at a 253-day win streak and advancing, which, as Sentiment Trader notes, suggests that the current advance could continue for a while longer.
We agree with Sentiment Traders conclusion:
“Stock indexes continue to grind higher, fueled by improving market breadth and consistent price momentum. In such environments, where nearly all indicators align-whether through expanding new highs, stocks trading above key moving averages, or bullish leadership in cyclical groups-it’s tempting to believe that the market can’t go any higher. Yet, history shows that markets often defy these expectations, pushing higher for longer than most investors anticipate. While a consolidation around the election is possible, the big picture heading into the most seasonally strong period of the year suggests investors continue to give the market the benefit of the doubt.”
As I stated, we agree, and there are three primary reasons why this win streak will likely continue into year-end, which supports our target of 6000 for the S&P 500.
Three Reasons This Bullish Win Streak Can Continue
On Tuesday, we discussed three primary drivers that could support the bullish streak through year-end and likely into early 2025.
Earnings
The first is earnings season, which has proved normal so far, although this week and next will be very important in corporate outlooks. As discussed in the latest BullBearReport, analysts significantly lowered the “earnings bar” heading into the reporting season. As noted in “Trojan Horses,” analysts are always wrong, and by a large degree.
“This is why we call it ‘Millennial Earnings Season.’ Wall Street continuously lowers estimates as the reporting period approaches so ‘everyone gets a trophy.’”
The chart below shows the changes for the Q3 earnings period from when analysts provided their first estimates in March 2023. Analysts have slashed estimates over the last 30 days, dropping estimates by roughly $3.40/share, but nearly $18 lower than their initial estimate.
Of course, lowering the bar will generate a high “beat rate” by companies, which will help fuel stock prices in the short term. Q3 has seen the largest moves by stocks on earnings day than at any other point in the last 15 years.
Performance Chasing
Secondly, according to Morningstar, during the first half of 2024, only 18.2% of actively managed mutual and exchange-traded funds outperformed the cap-weighted S&P 500 index. There are several reasons for this, including the lack of allocation to the “Magnificent 7,” dispersion in returns of holdings, and lack of allocation to non-traditional assets.
This underperformance occurs during the best presidential election year in roughly 90 years, which will pressure fund managers to play “catch up” with performance moving into year-end reporting. Given the “career risk” to managers of significant underperformance, additional buying pressure could manifest.
Corporate Share Buybacks
Lastly, corporate share buyback windows will reopen in November and December as companies exit their earnings “blackout period.” Notably, the last two months of the year represent the best two-month period for corporate executions as companies rush to complete buybacks for the current tax year. With nearly $1 Trillion in authorizations for 2024, the pace of buybacks will be exceptionally strong this year.
As noted by Goldman Sachs:
“The VWAP machines will be lining up to buy $6bn worth of equities daily during November and December.”
Yes, that is $6 billion each trading day, which provides sufficient buying power to lift asset prices into year-end.
All Win Streaks End
“So, if you believe that to be the case, why are you recommending taking profits and reducing risk?”
It’s a valid question but needs clarification.
When we discuss “taking profits,” it is often assumed that we mean selling everything we own. Nothing could be further from the truth. In most instances, we only return our positions to their original portfolio target weights, which increases our cash holdings. That action does lead to a performance drag in a strongly rising bull market but helps hedge portfolios against unexpected downturns.
We are becoming more concerned about a short-term, unexpected correction that could temporarily impair portfolios for three reasons.
The first is that investor sentiment is once again very “greedy.” Both retail and institutional investors have been piling into equities this year despite rising levels of uncertainty. The chart below, courtesy of TheMarketEar, shows non-dealer US equity futures positioning. If this trend continues, there will need to be a bigger chart.
Secondly, the market seems to be betting on the election’s outcome. As JP Morgan penned in a recent note:
“As odds of a Trump presidency and Red Wave have increased over the past few weeks, we’ve seen themes that are perceived to be Republican Winners (JPREPWIN) outperform Democratic Winners (JPDEMWIN) by ~7% over the past month. Crypto stocks and small caps have performed better, while Renewables have underperformed. In addition, the wider US equity market continues to make new ATHs and positioning appears to be elevated. Based on the thematic shifts, historical returns around elections, and elevated positioning, there’s room for a bit of disappointment and reversal in coming weeks if odds start to shift the other way.“
However, several risks to that narrative could lead to a sharp, near-term market reversal.
- What if Vice-President Harris emerges as the winner? In that instance, traders would need to reverse positioning.
- What if the election is very close and becomes contested by one party or the other? Given that Vice-President Harris will have to certify the election results, such becomes increasingly likely. Furthermore, lawyers are likely already prepping to file challenges in key states.
- Given the deep national divisions, regardless of who wins, we could see riots, looting, or more violent protests weighing on market sentiment.
- The next Federal Reserve FOMC meeting will also be held after the election. If the Fed pauses rate cuts or suggests future rate reductions may be less than anticipated, this could disappoint markets.
Hopefully, everything will go smoothly, and we will have an election winner by mid-November, and the Fed will remain on track. However, we can’t ignore the risk of something going wrong.
Lastly, from a purely technical view, a correction or consolidation is becoming increasingly likely, with the markets deviating well above monthly moving averages and being overbought. Still, it could take some time to develop fully.
So, yes, we want to participate in the current bullish win streak. However, as is always the case, win streaks always end. That is why we suggest a healthy diet of portfolio risk management and risk controls.
We are much less concerned about underperformance when the market is rising than underperforming when the market is declining. As always, making up losses is not the same as making money.
So, what do we suggest going forward?
Navigating Into Year-End
With the S&P 500 now in a seasonally strong period, bolstered by the weekly MACD buy signal, investors may want to consider several strategies:
- Increase Equity Exposure: Large-cap stocks historically perform well during this period. You could consider increasing exposure to diversified index funds or sector ETFs that align with historical trends. If you are a stock picker, focus on large-cap, highly liquid names that generate the strongest earnings growth.
- Review Portfolio Risk: While the MACD buy signal is a positive indicator, you should assess your portfolio’s risk tolerance and ensure it aligns with your long-term goals.
- Rebalance Allocations: Now may be a good time to rebalance by reducing positions in riskier assets or diversifying across asset classes.
- Use Stop-Loss Orders: To manage downside risk, consider using stop-loss orders.
While Ray is correct that we may be missing out by performing risk management processes while the “sun is shining,” such ensures that we won’t be caught without an umbrella which it begins to rain.
As we noted last week:
“The trick to navigating markets is not trying to “time” the market to sell exactly at the top. That is impossible. Successful long-term management is understanding when “enough is enough” and being willing to take profits and protect your gains. For many stocks currently, that is the situation we are in.”
As we head into the Mega-cap earnings reports, that advice remains relevant this week. The trick will be to navigate the outcome without making emotionally driven decisions.
Continue to follow the rules and stick to your discipline. (Read our article on “What Is RIsk” for a complete list of rules)
Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today’s volatile markets.
Have a great week.
Research Report
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Bull Bear Report Market Statistics & Screens
SimpleVisor Top & Bottom Performers By Sector
S&P 500 Weekly Tear Sheet
Relative Performance Analysis
Last week, the overbought/sold analysis on the bottom left showed that the average and median stock were overbought, with the broad market and many sectors pushing for more extreme conditions. We noted that such a setup allows the market to “rest” briefly before moving higher into year-end. This past week, the market took a break and retested the 20-DMA. While the bullish bias remains, this consolidation phase could last through next week and into the election. However, we suggest using the current “pause” to rebalance portfolios for a post-election advance into year-end, assuming the outcome is not a “highly contested mess,” which may muck things up.
Technical Composite
The technical overbought/sold gauge comprises several price indicators (R.S.I., Williams %R, etc.), measured using “weekly” closing price data. Readings above “80” are considered overbought, and below “20” are oversold. The market peaks when those readings are 80 or above, suggesting prudent profit-taking and risk management. The best buying opportunities exist when those readings are 20 or below.
The current reading is 79.06 out of a possible 100.
Portfolio Positioning “Fear / Greed” Gauge
The “Fear/Greed” gauge is how individual and professional investors are “positioning” themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, the more likely the market is closer to a correction than not. The gauge uses weekly closing data.
NOTE: The Fear/Greed Index measures risk from 0 to 100. It is a rarity that it reaches levels above 90. The current reading is 70.80 out of a possible 100.
Relative Sector Analysis
Most Oversold Sector Analysis
Sector Model Analysis & Risk Ranges
How To Read This Table
- The table compares the relative performance of each sector and market to the S&P 500 index.
- “MA XVER” (Moving Average Crossover) is determined by the short-term weekly moving average crossing positively or negatively with the long-term weekly moving average.
- The risk range is a function of the month-end closing price and the “beta” of the sector or market. (Ranges reset on the 1st of each month)
- The table shows the price deviation above and below the weekly moving averages.
Last week, we noted that “the market is now due for a correction or pause over the next few weeks to relieve some extreme deviations from long-term means.” That correction began this week and relieved some of the market’s overbought condition. However, gold, gold miners, and the dollar remain overbought, with the former two extremely deviating from long-term means. While bullish, those deviations can’t be sustained long-term, so a consolidation or correction is likely. Bonds, International, and Healthcare, are oversold and on bullish crossovers, so these sectors will likely see counter-trend rallies soon.
Weekly SimpleVisor Stock Screens
We provide three stock screens each week from SimpleVisor.
This week, we are searching for the Top 20:
- Relative Strength Stocks
- Momentum Stocks
- Fundamental & Technical Strength W/ Dividends
(Click Images To Enlarge)
RSI Screen
Momentum Screen
Fundamental & Technical Screen
SimpleVisor Portfolio Changes
We post all of our portfolio changes as they occur at SimpleVisor:
No Trades This Week
Lance Roberts, C.I.O.
Have a great week!
