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Markets Brace for CPI Tomorrow

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Stocks traded flat today, shaking off the initial concerns following Moody’s decision to downgrade the U.S. credit rating outlook from stable to negative. The Dow gained 91 points, an increase of 0.27%. Meanwhile, the S&P hovered around break-even while the Nasdaq Composite dipped slightly by 0.2%

Leading the charge in the S&P 500 were DaVita, Insulet, and Henry Schein, each climbing more than 7%. Boeing also contributed to the Dow's uplift, soaring over 4% after Emirates announced a whopping $52 billion order for 95 aircraft.

Moody’s announcement on Friday highlighted the U.S.’s “very large” fiscal deficits and the political deadlock in Washington as key reasons for the downgrade. Despite this, the agency maintained America’s AAA credit rating, the highest possible level. This move comes on the heels of Fitch’s earlier decision to lower the U.S. long-term foreign currency issuer default rating to AA+ from AAA, citing similar concerns about fiscal deterioration and political impasses.

Treasury yields remained flat, allowing traders to look past the downgrade in the equity market. Stocks initially fell on the news early Monday morning but later recovered.

Greg Bassuk, CEO of AXS Investments, commented, “We’re seeing investor reaction to the Moody’s downgrade, but we’re also seeing skittishness around some big developments pending this week. We think all eyes are focused on this week’s inflation data and the resulting Fed policy.” Bassuk anticipates continued market volatility through the end of the year, exacerbated by ongoing global conflicts and mixed economic data, dubbing it “the Grinch fueling the Christmas rally this year.”

Investors are now bracing for the release of fresh U.S. inflation data, with the consumer price index update expected Tuesday.

This week promises a departure from last week's focus on Federal Reserve commentary, with a slew of important data and events on the horizon. The spotlight is on Tuesday’s U.S. CPI, but U.S. retail sales on Wednesday will also significantly influence Q3 GDP forecasts. Other key U.S. releases include PPI on Wednesday and various housing data later in the week. Additionally, the NY Fed's 1-year inflation expectations report is due today. The potential U.S. government shutdown looming on Friday adds another layer of uncertainty.

The APEC economic leaders' summit, running in San Francisco until Friday, is another event to watch, especially for the anticipated bilateral meeting between Xi and Biden on Wednesday. Already, there are reports of China potentially resuming purchases of Boeing's 737 jetliners, signaling a thaw in relations.

China is also set for a major data release on Wednesday, while Europe will see the second print of the EA Q3 GDP, the ZEW survey (a German economic projections report), and UK employment and inflation updates. Moody’s is scheduled to conclude its review of Italy’s credit rating on Friday, currently on a negative outlook and just a notch above high-yield territory.

In a more unusual development, Iceland has declared a state of emergency following a series of powerful earthquakes, raising concerns about a major volcanic eruption. However, favorable wind patterns seem to have mitigated the risk to airline travel. This is a relief, as some unlucky travelers may recall being stranded in airports across the world during the last major Icelandic eruption in 2010.

Focusing on the U.S. CPI data due tomorrow, economists expect a modest increase of +0.1% month-over-month due to softer energy prices. They predict the core CPI to edge up to +0.4% from +0.3% last month (consensus at 0.3%). If these predictions hold, the year-over-year rate would be 3.3% and 4.2%, respectively, slightly higher than the consensus for the core rate.

Deutsche Bank also forecasts Wednesday's PPI to show a headline increase of +0.2% (down from +0.5%) and a steady core at +0.3%, with a keen eye on components that directly influence the Fed’s preferred core PCE, like healthcare services and airfares.

U.S. retail sales, also due Wednesday, are expected to be weak, with Deutsche Bank predicting a -0.4% headline change (down from +0.7%), mirroring the forecast for sales excluding autos (down from +0.6%) due to lower gasoline prices. Retail control, a component of GDP, is anticipated to show a modest +0.1% increase (down from +0.6%), a significant drop from the annualized +6.8% growth seen in Q3.

The market's expecting relatively muted data, which means that if we do see a big surprise (either hot or cool) from the CPI tomorrow, stocks could respond with a major move.

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I See Big Tailwinds for Stocks in 2024
By Marc Chaikin, founder, Chaikin Analytics
We're once again on the verge of a new all-time high... and beyond.

The S&P 500 Index made a new 52-week high in late December. It closed yesterday at roughly 4,780. It's now sitting about 0.4% away from its all-time high at around 4,800.

So in short, the bull market is alive and well.

Even better, as I'll explain today, it has significant tailwinds heading into 2024...

Two major shifts are likely to happen this year.

Thanks to lower interest rates and a resilient domestic economy, we'll likely see a resurgence in small-cap stocks. And I also expect the strength of the S&P 500 to broaden out into the other 493 stocks beyond the so-called "Magnificent Seven" tech mega caps.

That doesn't mean tech stocks will suffer, though. I still expect big things from this space as demand for artificial-intelligence chips and software keeps growing...
Based on the Technology Select Sector SPDR Fund (XLK), tech stocks surged more than 50% in 2023. It was a massive climb.

Since 1990, this sector has surged more than 40% in a single year seven times. According to data from Bespoke Investment Group, tech stocks continued to rally the following year in six of those seven instances. And they produced an average gain of nearly 22%.

That points to even more possible upside ahead for tech stocks.

Another potential driver for stocks in general is that 2024 is a presidential-election year...

Going back to the late 1800s, that's "bullish" for the stock market.

The stock market has only lost 5% or more in six out of 32 presidential-election years since 1896. And in five of those elections, the party in power lost.

Since 1950, the S&P 500 has rallied in 14 of 18 presidential-election years.

The strength was concentrated in the back half of the year, too. The index was up from the end of June through year-end in 16 of those 18 years – with an average gain of 10% over that six-month period.

Why is the market so strong in presidential-election years?

Well, it comes back to the power of the president to pump up the economy and make voters feel good in November. And 2024 shouldn't disappoint on that front...

Interest rates and inflation are still down significantly from their highs. Meanwhile, wages are still on the rise. And consumer sentiment is already on the upswing.

The Federal Reserve will likely cut the benchmark federal-funds rate three or four times in 2024.

And a less visible but equally as important factor is the end of the Fed's quantitative-tightening ("QT") efforts – those policies designed to reduce its balance sheet. The December meeting minutes showed that the Fed talked about it for the first time.

Meanwhile, according to the December Consumer Price Index ("CPI"), prices ticked up 3.4% over the prior year. That's a slight increase from the 3.1% increase in November.

On the other hand, core inflation – which removes the volatile food and energy categories – fell slightly to an annual rate of 3.9% from 4.0% the month prior.

Earnings are on the upswing as well. The Atlanta Fed estimates that fourth-quarter gross domestic product will be up 2.2%. And it expects further gains in the first half of 2024.

That's all great news for investors, of course. Falling inflation overall, declining interest rates, and rising earnings mix together to produce a positive outlook for stocks.

So for now, my point is simple...

I'm as "bullish" as ever on stocks in 2024.

Good investing,
Marc Chaikin
 
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Tomorrow’s CPI Could Be “Market Breaking”
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Stocks took a small step up on Monday, building on their gains after the S&P 500 jumped above 5,000 for the first time on Friday. The S&P went up by 0.3% and the Dow wasn't far behind with a 0.5% increase. Meanwhile, the tech-heavy Nasdaq Composite climbed 0.3%, showing that tech stocks still have some juice left.

Nvidia sprinted ahead again with a 2% increase on the morning to set another record. British semiconductor powerhouse Arm wasn’t about to be left in the dust either, as it soared to new heights, continuing its winning streak from last week.

The market's mood has been pretty upbeat, thanks to some surprisingly good news from the corporate world. Big tech companies, in particular, have been hogging the spotlight. Now, everyone’s waiting with bated breath for the next set of earnings reports. There are still a few big names on the list, including John Deere, Coca-Cola, Airbnb, and Kraft Heinz, but with tech out of the way, the next few reports shouldn't be too market-tilting.

But that's not all; the January Consumer Price Index (CPI) report comes out on Tuesday. The CPI could spoil the fun of the last few sessions if it clocks in hotter than expected. Rising inflation would undoubtedly dent sentiment, especially after megacap tech earnings beat estimates. This would cause yields to tumble while spiking volatility, potentially plunging the indexes into a sharp selloff.

Even the folks at Goldman are waving a red flag, saying "We are seeing elevated risk of a momentum reversal," in a weekend note to clients, pointing out that things like Quality, Mega Cap versus Non-Profitable Tech, and HF VIP versus Most Short are starting to show cracks. The bank added that "you don’t want to be on the wrong side during a momentum crash."

And while no one's outright yelling "crash ahead," the S&P skew's recent spike to levels not seen since just before the Volmageddon event in 2018 has eyebrows raised. This was when the VIX went on a wild ride from 14 to 40 in no time flat. Amid this backdrop of what feels like bubble territory and a market too cool to care, Goldman trader Matthieu Martal drops a note. He says, "US tech going parabolic and everyone in the same trades" means, although they're generally positive, the current run in equities seems a bit overdone. They're leaning towards more unloved stocks with sensible price tags.

So, Goldman's strategy is to steer clear of the big tech and high-quality stocks for now due to the risk of a momentum downturn and too many folks in the same boat. They're eyeing up the underdogs and small caps that might benefit from inflation getting back to normal.

The note read:

"To quote a client, you only want to be long vol one in six years and the beginning of a cutting cycle typically bides well for equities. Reflationary risks could be overlooked but you would need a catalyst to de-rail the goldilocks narrative in our view."

In other words, if inflation ticks higher again, all bets are off for how low stocks could go in the short term.

Goldman's observations are pretty clear: the investment world is all in, with data showing everyone's doubling down on the same bets. US tech, in particular, has seen a buying frenzy, making it the popular kid on the block. But this popularity comes with its risks. A little nudge could cause a big squeeze, especially with all the action around cryptocurrencies and meme stocks. They've noticed a trend where the usual winners are starting to lose their shine, suggesting that the easy money might not be so easy anymore.

The excitement around US equities, reminiscent of the dot-com bubble vibes, is making some wonder if this party can keep going. There's a lot of talk about momentum and crowded trades getting too cozy, which could spell trouble. History has shown us that when things look too good, a correction of 25-30% in overvalued areas isn't out of the question.

But it's not all doom and gloom. Strong earnings and a sturdy consumer base are keeping hopes of a soft landing alive. Luxury goods, for example, are still in demand, painting a picture of an economy that's not ready to slow down just yet. However, there are some mixed signals across different markets, hinting that not everything is as rosy as it seems. The consensus on inflation cooling off is strong, but if it starts to pick up again, that could be the curveball no one saw coming.

And if Tuesday's CPI numbers are too hot for comfort, that curveball could hit bulls right in the face.

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What This 123-Year-Old Theory is Saying About the Stock Market

February 12, 2024 | Tim Fortier

More upside to come? Or too late to the party? The classical Dow Theory triggered a Buy signal on 2/8/24 when the Dow Transportation finally surpassed its 12/19/23 highs.​

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What is the Dow Theory?​

Tracing its origin back to the early 1900s, the Dow Theory was first postulated by Charles Dow in 1901.
Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of significant market trends and the likely direction individual stocks would take.

The work of Charles Dow, who died in 1902, was further expanded upon by William P. Hamilton’s The Stock Market Barometer (1922), Robert Rhea’s The Dow Theory (1932), and Richard Russell’s The Dow Theory Today (1961).

Besides defining the trend of the market, one of the basic tenets of Dow Theory is that indices or market averages must confirm each other. This means that the signals on one index must match or correspond with the signals on the other.

If one index, such as the Dow Jones Industrial Average, shows a new primary uptrend, but another remains in a primary downward trend, traders should not assume that a new trend has begun.

Dow used the two indices that he and his partners invented, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA), on the assumption that if business conditions were healthy—as a rise in the DJIA might suggest—the railroads would be profiting from moving the freight this business activity required; thus, the DJTA would also be rising.

Despite being over a century old, Dow Theory remains relevant in today’s high-tech, global markets. Traders worldwide still use its principles to gauge the health of the market and identify potential trading opportunities.

Which brings us back to last Thursday when the DJT confirmed the DJI and joined the party of other indices already in an uptrend.
Critics of the theory cite that by the time a trend is confirmed, a significant portion of the price move may have already occurred, reducing the effectiveness for traders seeking timely entry or exit points.

Critics also argue that this focus on a limited number of stocks may not accurately represent the entire market or specific sectors.
Despite these concerns, one thing remains true:

A trend is assumed to be in effect until it gives definite signals that it has reversed. This tenet forms much of the foundation of modern trend-following approaches.

For market bulls, the current market is showing some improvement from the perspective of trend, as more indices are showing improvement.

For instance, today, the equal-weight S&P 500 is breaking out of a consolidation it has been in since the beginning of the year.

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And small-caps, which have lagged the broader market the most, are making a run at their recent high.

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Another encouraging sign is that small caps relative to large caps are showing a recent surge in relative performance as this chart demonstrates.

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A broadening of the trend would be a welcome relief for many, as one of the most cited concerns for the current stock market rally is the weak market breadth.

The S&P 500’s current rally is being driven by an incredibly small number of stocks, and that has some folks convinced that this narrow “market breadth” is a big warning sign.

And it’s not hard to see their point.

A wider market breadth – which would have more of the index’s 500 stocks rising at once – would make the rally seem altogether more sustainable. It would suggest that more industries and businesses are doing well, implying greater confidence in the economy. It would also mean that the market is less vulnerable to the ups and downs of just a few companies.

With just 26% of stocks outperforming the broader index, the breadth is at a low that’s rarely been seen before (bottom half of the chart).

In fact, the last two times leadership was this narrow were in the Nifty 50 period of the 1970s and during the dotcom boom of the late 1990s.

In those cases, stocks did continue to rise for a while. But it eventually ended in tears with stock prices dropping 50%.

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The industry curve has also yet to reflect any improvement with only 40% of the curve currently bullish.

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Ideally, this begins to show some signs of improvement to better align with the signal coming from the Dow Theory.

While modern markets are much different than when the Dow Theory was originally founded, the basic tenets of trend following remain true today. Currently, the price trend of many of the popular stock market averages are in favorable positive trends, despite the noted concerns.

Charles Dow had once compared the markets to that of the tide. Currently, the tide is still rising – is it strong enough to lift more boats?

Until next time,

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