This past week’s economic data pushed stocks into unchartered territory.  First, the 4^th quarter GDP came out above consensus at a blistering 3.3% pace. (It recorded 2.9% for full-year GDP).  PCE (Personal Consumption Expenditures) came in as expected, but year over year was at 2.9%.  Below the expected 3%.

Market Gauge

However, digging deeper into the recently released much stronger-than-expected Q4 GDP report, you’ll find a bonus in the core PCE Deflator data. The PCE Deflator rose at an annualized rate of 2.0%. By this measure, the Fed’s 2% inflation target has been achieved—for the second quarter in a row.  See chart below.

One of the bright spots of the recent economic reports, including the CPI and PCE, is that sky-high rents have come down at a brisk pace.  See rent chart below:

This harkens back to the beginning of November.  The economic numbers then also came out showing favorable inflation cooling.  You will recall that the Federal Reserve pivoted off their hawkish sentiment, and immediately, the market rocketed higher.  The S&P has been up 12 of the past 13 weeks.  See chart below:

Looking back to the beginning of 2024.

It seems like yesterday when we were welcoming in the New Year and beginning the process of prognosticating what might occur in 2024.  Surprisingly, the markets started off weak for the first week of the New Year.  But since then, it has been moving up almost daily.

So far in January, the S&P 500 (SPY) is up 2.55%, which would be annualized at 33.2%.  The NASDAQ 100 (QQQ) is up 3.49%, which would be annualized at 44.5%, the Dow Jones Industrial Average (DIA) is up 1.12%, which is an annualized rate of 14.6%, and the Russell 2000 Small-Cap Index (IWM) is down -2.36% which would be an annualized rate of -30.74.

Take note of two important facts about the performance numbers above.  If the positive markets (SPY & QQQ) were to continue at this pace, the 2024 returns would surpass last year for the S&P 500 and come close to matching the NASDAQ 100 for all of last year.  Secondly, the more undervalued areas of the market (including small and mid-cap stocks that typically have faster growing companies, would be negative on the year.

This is likely NOT going to happen and one should not use the January returns as an indication of what will occur for the remainder of the year.  (please go back to the early 2024 Market Outlooks and read what historically happens for a better perspective)

If you are a follower of MarketGauge and get a chance to join Keith, Mish, or Geoff’s coaching sessions and webinars, you are aware that the January “Calendar Range,” which was completed on January 16^th, can set the tone and define inflection points for the rest of the year. For more information on the January Calendar Range see Mish and Geoff’s recent video for StockCharts.

As we noted last week, it was no surprise that the first week of the year showed market weakness, given the positive and robust October and November with outsized gains.  Investors wanted to take some profits but were waiting to push those off until the 2025 income tax period.

Looking at New All-Time Highs in the S&P 500

The S&P 500 also closed at record all-time highs (ATH) for the 6^th consecutive day on Thursday, making this the longest streak of record highs since November 2021.

Regarding the record new ATH of the S&P 500 Wednesday evening, Ryan Detrick of the Carson Group pointed out how rare these truly are.  See his commentary below:

We have provided a history below of how many ATH have been recorded each year looking back to 1929.  Please note the many years with 0 (zero) new All Time Highs and other periods where we many successive years with no new ATH for a considerable and extended period of time.

When price is in uncharted territory like this, technicians and analysts often use Fibonacci extensions to establish potential resistance levels or targets.

Analyst Ian McMillan points out that the 161.8% extension of the 2022 decline is between 5,400 and 5,600 which is a move of 10% higher from here.  The question is “will it move in a straight line”? To which Ian answered, “I highly doubt it, but it is a target nonetheless.” See chart below:

A look at few of the key sectors that are driving the capitalization weighted indices:

Technology  

The Technology sector, with its many mega caps stocks, continues the impressive move higher.  Recently, as the chart below shows, technology became a 30% weighting of the S&P 500 Index.  The last time we saw this was in 2000. That was about the time when the sharp correction in Tech stocks began and lasted until 2022.  Technology’s influence on the S&P 500 performance cannot be underestimated.

Within the technology sector, semiconductor stocks are also on a blistering growth phase and have entered unchartered territory. 

Through all the articles and news programs on the “CHIPS” and the stimulus bill this administration passed to subsidize US chip development and manufacturing, the world has become acutely aware of the global impact of innovation and growth in this industry.  This growth in new semiconductor chips is likely to fuel the trend of Artificial Intelligence (AI) emerging as THE LEADING productivity and efficiency advantage for the future.  Every semiconductor manufacturer and those that make the equipment for the chip process are growing at accelerated rates.  They are also competing for the fastest, most innovative, and most productive chips.  See the influence that semiconductor stocks are having on the S&P 500 below:

Because of the semiconductor industry’s growth and influence, the tech heavy NASDAQ 100 (QQQ) index has recently broken out to new All Time Highs.  It could head much higher according to many analysts and market technicians.  See chart below:

Many stock historians, including our own Mish Schneider using her Economic Modern Family, often comment that semiconductors (in Mish’s case Sister Semiconductor) are one of the leading indicators that fuel the economy.  Semiconductor chips are tied to so many other industries and have a great influence on other sectors including consumer discretionary, autos, electronic products, software development and many others where there is constant evaluation on how these chips will aid in business efficiency and productivity. To that end, the semiconductor area often leads the market, as evidenced by the chart below:

And worldwide sales have turned positive.  See chart below:

Financials are perking up.

Another area of the market that is attracting capital is the financial sector.  If interest rates are truly about to decline and later this year the Fed lowers the Fed Funds rate, as the Fed announced and most economists predict, then this would be no surprise.  The Financial Sector (XLF), Regional Banks (KRE), and Insurance Companies (IAK), have been in rally mode since before the New Year.  See a few charts below:

A great way to see how each of the major market sectors are holding up within the S&P 500 is to analyze how many stocks, in each sector, are above their 50, 100 and 200-day simple moving averages (SMA).

See the chart below, which clearly illustrates that the Financial sector is the only sector showing greater than 90% of the stocks currently above the 50, 100, and 200-day moving averages.

A quick note.  It is always better to use momentum as your friend when investing in the stock market.  Many of the algorithms that we have designed, distributed, and utilized by MarketGauge and other related companies, evaluate ongoing momentum and how strong the trend is while it continues.  These work so well because the indicators recognize, early on, what areas are likely to continue performing well.

I noticed during our recent rotation in our Large Cap Leaders investment model that the strategy was to invest in a few large financial stocks.  That is the beauty of quant-driven, formulaic, risk-managed investing. In our case, we often see trends before they take off.  This happened in energy in 2022, in the cruise lines and homebuilders during 2023, and now again in attractive financial stocks in 2024.

If you would like more information on how our investment strategy, Large Cap Leaders, has done historically, or you would like to know what it is currently invested in, please contact our Chief Market Strategist, Rob Quinn, at Rob@MarketGauge.com.  Rob is very savvy in putting together investment edges to create a potentially smoother ride with more upside.  Combining various MarketGauge strategies has shown outstanding historical risk-adjusted returns. 

Then there were six.

When I was in high school one of my favorite rock bands was Genesis.  If you know them, you may remember their front man vocalist Peter Gabriel.  After a few successful albums and tours, he left and went on his own.  Nobody was sure that Genesis would survive.  But they released an album called AND THEN THERE WERE 3 with Phil Collins as their vocalist and front man.  They built a different, more mainstream audience and got even bigger.

I wanted to include a few charts showing the Magnificent 7 and the work of our brilliant colleague Jeffrey W. Huge, CMT, (go to www.jwhinvestment.com for more information) that he produced this past week.  Hopefully, Jeff will soon be collaborating with us on our new site, MarketGaugePro.com, focused on the professional Advisor who manages other people’s wealth.  When he wrote AND THEN THERE WERE 6 about the Magnificent 7, I couldn’t help but think about Genesis and their award-winning album (and then there were 3).

I have provided Jeff’s recent comments and charts below.  I could not have done a better job of replicating the interesting and significant comments about the Magnificent 7 stocks that Jeff makes.  These 7 stocks (Apple, Amazon, Google, Microsoft, Netflix, Nvidia, and Tesla) combined were responsible for over 50% of the 2023 return of the S&P 500 index.  See Jeff’s comments and charts below:

“And then there were six. As the trend of mega-cap dominance continues from 2023 into 2024, there has been one notable exception. The shares of TSLA are now down some -26.5% YTD -- a start to the year so poor that financial media pundit Jim Cramer stated that the stock should now be eliminated from the Magnificent Seven. As if that would change anything?! Moreover, the performance of the equally-weighted Roundhill Magnificent Seven Big Tech ETF (MAGS) has tracked that of the Nasdaq 100 to within a single basis point YTD, further illustrating the importance of these now six mega-cap tech leaders to the overall performance of the major US stock averages”.

Jeff also produced a brilliant overview of the market after these past 3 weeks which is included below.

“At the risk of sounding like a broken record, YTD stock market returns have been less than stellar for the vast majority of stocks thus far. Aside from the Nasdaq 100 and S&P 500 cap-weighted indexes, all other major market segments are underperforming 3-month US T-bills YTD, and all but the Dow Jones Composite (combined Industrials, Transports, Utilities) are in negative territory for the year. A whopping 71% of the S&P 500’s constituents are underperforming the benchmark, while a full 42% are negative for the period. Indeed, as of Thursday’s close, NVDA and MSFT were responsible for over 50% of the S&P 500 indexes’ YTD total return”. See illustration below:

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