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Before we start, we'd like to wish you a very happy Thanksgiving Day. We hope that you enjoy this holiday of gratefulness with family and good friends. We also hope that you had a prosperous investing week in the markets.

Cooling Inflation Numbers Fuel a Big Bull Market Day on Tuesday

This week, the CPI came out lower than expected (while Core stayed the same) and relieved investors of the potential pressure that the Fed may hike rates at their meeting next month. See chart below:

This information prompted a huge rally in all types of bonds and lowered the 10-year rates significantly. After hitting a high of 5%, which has not been seen since 2007, the ten-year Treasury bond rallied all week. Since early November, the 10-year rate has now declined about 50 basis points. See chart below:

This also caused the US dollar to sell off, as money fled from safe havens and found its way back into risk assets, higher-yielding bonds, and equities. As we discussed numerous times over the past two years, a weaker US dollar is good for stocks as well as other risk assets, and it will contribute to the commodity super cycle (including gold & silver) that Mish has been projecting in her numerous “on-air” appearances as of late.

With bonds rallying and the dollar sinking, stocks gapped up from the start of the day Tuesday and put in the second best daily stock market performance since earlier in the year. See the US dollar chart below which coincides with this recent rally in risk assets:

It is estimated that $23 billion of the $6 trillion in money market funds sitting on the sidelines found its way back into the market. We saw significant inflows into the market this week. These were also the second-best inflows of the year, matching what took place back during February’s explosive stock market move higher. See chart below:

This is a good sign, but can this upward move continue?

Soft Landing?

Since early November, the US stock (and bond) markets have been sending a very clear message. The positive market sentiment recently is signaling that investor bets believe the Federal Reserve is done hiking interest rates that were necessary to rein in inflation.

This week’s CPI and PPI data indicated that price surges are beginning to ebb and the economy is slowing as the Fed intended by raising rates for the past 20-plus months. In fact, surprisingly, some of the economic analysts and investment houses are even putting wagers on a rate cut for early next year.

We remain of the opinion that we will likely see higher rates for longer. Additionally, a dramatic difference of opinion remains between market pundits who believe we are headed for a recession soon, and those who believe the Fed has commandeered a “soft landing” and the economy will stay on a growth trajectory right up until the 2024 Presidential election.

This week, the head of the world’s largest retailer even went so far as to predict that consumer prices could soon drop. “We will be managing through a period of deflation in the months to come,” Walmart Chief Executive Officer Doug McMillion said during the company’s earnings call.

Zero Chance

Something truly amazing happened in the rate futures market this week. The 18-month nightmare of second-guessing the force on how much and how high the Fed will hit the brakes seems over. The Fed’s hawkish sentiment seems to have hit a pause button. Will it be permanent with the next phase prompting rate cuts?

The futures markets are now suggesting a zero implied chance that the Fed will tighten next month. See the chart below on the implied future rate hike expectations:

It's Not Time to Celebrate Yet

We remain somewhat skeptical. Given the persistence of inflation and the geopolitical risk in the Middle East and its potential ramifications on world energy prices, we are going to stay neutral and say, “only time will tell if we don’t see any more Fed hikes.”

Certainly, inflation could rear its ugly head again, and I say this with the knowledge that we have a labor shortage in this country, and that may likely keep employment robust and wages inflationary. There are other inflationary prices at work as well, including (but not limited to) food prices, which we do not see declining anytime soon.

This Week’s Market Rally was Broad-Based

During most of 2023, we have heard about the 'Magnificent 7' fueling the majority of the S&P 500 cap weighted index return. Statistics show this to be fairly accurate. Even with this week’s massive rally, the equal weighted S&P index (RSP) is still flat for the year. See illustration below:

However, the bullishness in the market has been broadening out. This is a good sign, indeed.

In fact, our investment strategy profit navigator went bullish in late October. We provide a couple of charts showing the performance of the market and the more broad participation of stocks in the S&P. See below:

Can the Upward Bias of the Stock Market Continue?

Yes. As we have pointed out in previous discussions, along with a wide multitude of charts and graphs, we are now in the best six months for investing (from November to April). The seasonal upward bias is upon us.

Given inflation cooling, interest rates coming down, the recent weakness of the US dollar, weakness in the price of oil (oil fell from $85 to $72 per barrel), and so far, geopolitical risk not spreading, we are in a more positive environment for stocks. These are all important inputs that may prompt stocks to run further.

Earnings are Essential

According to FactSet, 94% of S&P 500 companies have reported their Q3 2023 results, with 82% beating their earnings estimates and 62% reporting revenues above their estimates. These are better than analysts’ early 2023 expectations, and are certainly contributing to the upward bias of good quality stocks and their influence in the rise of the major indices.

Additional Signs that We May Have More Upside Potential

There are additional signs that provide empirical evidence that we are in a “bull” market that began in early 2023. Here are a few of the charts that support this notion:

The industrial sector is important, as no single stock has a big weight. See the XLI picture from All Star Charts below:

On Wednesday, Ryan Detrick of The Carson Group came out with this data, supporting the recent rally in stocks:

Seasonally, the US dollar tends to get weaker at the end of the year. That should help propel stocks higher. See graph below:

And of course, the composite of the Magnificent 7 made a new all-time high this week (Alphabet, Amazon, Apple, Microsoft, Netflix, Nvidia, and Tesla). See chart below:

In addition to these new highs, a bullish sentiment reading, huge inflows into the market, and a good seasonal period, we also track some proprietary indicators. One of our favorite illustrations is the number of stocks above their 50-day and 200-day moving averages for the NDX (Nasdaq 100) and the S&P 500, among others. Here are the charts from Friday’s close.

The 50-day moving average is a short-to-intermediate investment period. You may notice on those charts that the color has been blue and in a positive period since before the end of October. The charts indicating the number of stocks in the indices above the 200-day moving averages are longer-term investment indicators. As you may note, these have begun to gain a positive bias (turn up), indicating a positive technical picture for longer-term investors. The number of stocks above their 50-day moving averages:

The number of stocks above their 200-day moving averages:

The Market Rally was Not Unexpected

If you are a frequent reader of our weekly outlooks, you may be well aware that Ryan Detrick of The Carson Group is one of our favorite market technicians and historians of the Presidential Market Cycle. Earlier in the week, he shared this graph with his readers:

Growth Over Value

The yellow arrows point to growth stocks outperforming value. This illustration demonstrates that we are in a risk-on period. Notice the recent performance when growth stocks (as shown by VUG) got knocked down, as well as those periods when value stocks (as shown by VTV) outperformed. This period was plagued with higher interest rates and a stronger US dollar. Let’s hope growth continues to outperform. See chart below:

A Few Cautionary Signs

We would be remiss if we did not point out a couple of cautionary signs that could occur to stop this rally in its tracks. These include the following:

• Geopolitical risk spreads. This could include more severe action in the Middle East, Ukraine, or even some problem with China and Taiwan.
• Energy prices spike -- most specifically, oil prices go up. This could be because of the aforementioned point or perhaps because the OPEC nations cut back production. This would be inflationary and could stall the cooling inflation rhetoric.
• Inflation has a hiccup. That might prompt the Fed to regain a more hawkish approach.
• Stocks are overvalued and may need to pull back if the earnings expectations for 2024 do not support this bullish thesis. In our estimation, the market currently is selling for over 20x current earnings and probably 18.5x-19x if earnings were to grow by 15%. That is not likely. So, the S&P 500 at current earnings is more likely fair value at 3800-4200.
• Last, there are a few blaring gaps in the recent activity of the S&P 500. Most gaps, especially this big, get filled within 60-120 days. While nothing is guaranteed, we want you to know that these gaps (as shown by the blue circles) attract money to the downside. See illustration below:

We will now turn it over to Keith and his team to share some other economic factors that may play a part in the markets. Thank you for reading. Have a safe and enjoyable Thanksgiving holiday.

Risk-On

• All four indexes had huge moves for the week, with three out of the four being in bullish phases. However, the move is not “overbought” yet
• All sectors were up for the week, led by retail and homebuilders, pointing to stronger economic fundamentals. Risk-off sectors were the weakest, confirming risk-on sentiment
• Alternative energy dominated the weekly gainers, favoring a risk-on scenario. Regional banks (KRE), which had been a drag on the market, was one of the biggest weekly gainers
• All three moving averages for new highs/new lows are stacked and sloped in a bullish configuration for both the SPY and the QQQ
• With the exception of high yield debt vs. bonds, all the risk gauges are positive
• Cash volatility falling is consistent with the overall market direction
• The number of stocks above key moving averages flipped from oversold readings to positive readings in the SPY, although these readings are running a bit rich on a short-term basis
• Sentiment readings are positive, with plenty of upside potential before reaching an overbought condition
• Growth stocks hit a new 2023 high this week and continue to outperform relative to value stocks, which, despite the performance seen this week, remain flat on the year
• With interest rates backing off this week, the dollar gapped lower, which was bullish for equities in general

Neutral

• The Russel 2000 is in a weak recovery phase, and if it can clear the 200 DMA above $191.04, such a move would be an important confirmation for the overall uptrend in equities
• Despite the run-up in the markets, volume readings backed off to a mostly neutral stance
• There was a potential divergence seen in the McClellan Oscillator, as it did not confirm new highs. However, until the market takes out the midpoint on the oscillator, it remains at a positive reading
• There was a mixed read on interest rates, with short-term rates failing to take out its 200 DMA by Friday's close, while longer-term rates eased and closed above their 50 DMAs
• Small-caps, which are the most susceptible to higher rates, had a historic, strong thrust of +7.12% this week. However, they still remain in a recovery phase
• Despite soft commodities (DBA) lagging the S&P, they remain in a bull phase, with a critical triple top overhead resistance at $22.50
• Gold and oil remain under pressure on a relative basis, though both recovered their 200 DMA by Friday's close

Risk-Off

• Despite the big run-up in housing (XHB), copper remains under tremendous pressure and in a bear phase

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Has The Fed Closed The Door To Future Rate Hikes, Or Does The Door Remain Partially Open?
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