Freepik

Welcome back Gaugers.  We hope that you have had an enjoyable Thanksgiving holiday and have been participating in the positive markets that we have recently experienced.

Most major indices finished this holiday shortened week up around 1%.  Interest rates have been drifting lower and now we are below 4.5% on the 10-year Treasury.  This is a steep decline over the past month after hitting 5% in late October.  See chart below:

The above illustration is one of many we want to share with you in this week’s Outlook.  The above picture paints a clear story of the 2022-2023 Fed induced hawkish interest rate rise culminating in rates hitting an area (5%) we have not seen since 2007. Right before the GFC (Great Financial Crisis) of 2007-2009.

At some point, higher interest rates begin to impede the forward positive bias of the stock market.  It especially hits small-cap stocks (Russell 2000-IWM) and value stocks (VTV) the hardest as these companies are much more interest rate sensitive.

A Deeper Dive

If you are a longtime reader of the weekly Market Outlook, you are well aware that we like to present charts, graphs, and tables in this column.  We believe that looking at these provides you the opportunity to see the “whole” picture.  As I have repeatedly heard most of my life: “A picture is worth a 1,000 words.” 

Looking back as recently as this past month, we see that as soon as investors perceive that the hawkish Federal Reserve appears close to being done raising rates, bond prices rallied and interest rates came down.  Much of this was precipitated by weaker economic numbers showing cooling inflation.

In turn, this set-in motion weakness in the US Dollar and a quick rally in stocks.  Here is another chart giving even more of this picture.  Look at how closely correlated the decline in interest rates and the rally in the S&P 500 index.

Our view:  Interest rates came down fast, perhaps a knee jerk reaction for those who were short bonds or sitting in short-term money market funds and wanted to get reinvested quickly.  We remain cautious and believe that rates could climb back up towards 5%.  This might wait until early 2024 and might spark a bond market sell-off.

We are skeptical that inflation will continue to keep declining and instead remain on alert for a hiccup in energy, food, and services prices that may stay elevated.

Investor Sentiment

We have often pointed out, in previous Market Outlook columns, exactly how important investor sentiment is to drive stock market action, especially upward.

Again, incorporating charts/graphs we want to illustrate the recent and rapid changing investor sentiment readings.  We point this out to prove the point that whatever creates a shift in investor sentiment (in this case a Fed pause in hiking rates and interest rates and the US Dollar falling) can set in motion a rapid change in the market’s trend.  The charts below are based on the AAII (American Association of Individual Investors) sentiment readings over a 4-week period.

Also, notice the change in sentiment from this same group on their expectations of the stock market for the next 6 months, which has recently become very positive.  If you are a contrarian investor, these rapid shifts could be pivotal to taking a “hedged or opposite position.”  See below:

In concert with the above charts and according to the updated Fear/Greed charts provided by our friend (and soon to be contributing member of MarketGauge Pro), Jeff Hugh of Alpha Insights the CNN indicator below shows we are firmly in the GREED camp again.

The number of stocks above their 200-day moving averages within different indices have increased significantly and are giving a signal for a sustained “up move.” 

We introduced this chart on several occasions in the past and want to provide an update from just a week ago. We now see additional evidence of a confirmed move using the longer-term appreciation of stocks above their 200-day moving averages.  This is a positive sign.

These charts help navigate the markets and are most helpful in identifying turns in different market segments.  See chart below:

The first chart is the Dow Jones Industrial Average:

The next chart is the S&P 500 Index:

The last chart is the NDX (Nasdaq 100) and like the two above, shows that we have recently gotten a favorable upward bias signal.

Just as important as when to get in, please notice the above charts and their indication back in early August to get out of the markets.

Other Market Perspectives:

(Yahoo!Finance) - The stock market has had a stellar run in 2023, and the equity strategy team at Bank of America expects another strong year in 2024 will send the S&P 500 (SPY) to a record high of 5,000.

In a note to clients published Tuesday, Savita Subramanian and her team at Bank of America argued the coming year will be a "stock picker's paradise" as markets move past the "maximum macro uncertainty" investors faced this year.

"The market has absorbed significant geopolitical shocks already and the good news is we're talking about the bad news," the firm wrote.

"Macro signals are muddled, but idiosyncratic alpha increased this year. We're bullish not because we expect the Fed to cut, but because of what the Fed has accomplished. Companies have adapted (to higher rates and inflation."

The firm's forecasted year-end target for the S&P 500 implies the benchmark index will rise about 10% from current levels. The firm had a year-end price target for 2023 of 4,600 on the S&P 500.

Growth versus Value

As we have pointed out as well on numerous occasions, when growth stocks are most in favor, you will likely get a sustained up move in the markets.  Such has been the case over the past month.  The question is, will Growth stocks continue their upward march?  They are now hitting resistance (3x during 2023); if they can break through this resistance, we will get a move higher, no doubt.  We are at a pivotal place.

With information from friends at Grindstone Intelligence, we show the comparison of the Russell 1000 (top 1,000 companies by capitalization) Growth versus Value.  See below:

Will the third time be the charm?

What areas of the Russell 1000 (top 1,000 stocks) constitute Growth and what makes up Value?  The below chart helps to define the sectors that drive these two different areas of the market and indices:

It is further interesting to know that with the S&P 500 Cap Weighted index up 19% and the Nasdaq 100 up about 40%, the area that is driving the market the most is Information Technology stocks.  See chart below:

Also, how many stocks make up each S&P 500 Sector is important to review.  Information Technology is influenced by the least number of large-cap companies and the Industrial sector is made up of a large number of stocks that have a much smaller influence (4%).  See chart below:

Conclusion

We remain optimistic that the current stock market environment has legs.  We are in the best seasonal period to be invested in the stock market.  Geopolitical risk has come down slightly along with oil and energy prices.  There are a host of issues that could derail the markets, including continued economic weakness.  But we remind ourselves that this period in a pre-election year tends to be positive.

Hopefully, we have provided empirical evidence of some of the current tailwinds (above) that would have us lean heavily bullish for the moment.  We hope, in some way, we have given you insight as to what the charts, graphs, and tables are providing as far as the complete picture.

Thank you for reading and have a good, prosperous, and productive week. 

More By This Author:

Investors Were Thankful This Week After Cooling Inflation Data - Will We See Additional Follow-Through?
Has The Fed Closed The Door To Future Rate Hikes, Or Does The Door Remain Partially Open?
A Frightful October In The Markets - Will The November Seasonal Turn Happen?