The S&P 500 and QQQ look to be trying to stabilize and rally after a very sharp two-week decline into this week. Trends in the DJIA look far better in the short run than SPX and QQQ which remain within two-week downtrends. Thus, while Friday’s rally was encouraging, it can’t be said with confidence that a move back to new highs should happen right away. However, it’s expected that this week brings about a rally into the FOMC (Federal Open Market Committee) meeting, but sufficient upside progress needs to happen to argue that this move can continue without any further weakness into August. The current cycle work seems to show a larger likelihood of an early to-mid- August bottom vs. late July. Thus, while it’s right to be optimistic for an eventual push back to new all-time highs this Fall, I suspect it could prove choppy, and not without some backing and filling. US Dollar and Treasury yields are both beginning to rollover, which looks good for risk assets given recent correlation trends. A picture tends to be worth a thousand words, and here is what the S&P 500 looks like relative to the Small-Cap index. I have highlighted the recent action that I have referenced above:
Overall, the market bounce that started on Friday looks to have occurred on schedule, and I remain optimistic that this can carry Equities higher into the FOMC meeting. However, more will need to occur to suggest this rally can get back to new highs without any further consolidation into August. To just give a bit more color on the US Fed, their target range remains 5.25%-5.50%, where it has been for the past year. This pause until the expected ease is longer than average but not a record. There is no reason to rush a rate cut this week. But the Fed should be preparing the markets for a September rate move, conditional on the data cooperating. The problem with being data dependent is that we risk falling behind events. The Fed is evaluating data that is lagged and the impact of its policy response is also lagged. Powell’s trepidation is because he feels the first move is “consequential” and starts a runway for greater action. There is not enough meat on the bone to start as of yet. This week is quite important in this regard as we near the election.
Momentum has turned more negative given the selling from mid-July, and this shorter-term downtrend could remain in place given the great number of earnings reports coming this week particularly in the larger technology space. Thus, while there remain many reasons to be optimistic on equities between now and early-to-mid-September, it’s not wrong to say that stocks have entered a more difficult period in 2H than what happened over the first six months of the year.
The market’s positives have to do with intermediate-term trends from last October being intact, and leading groups like Technology, Industrials and Financials showing great technical strength, despite the minor pullback in Technology. Moreover, the “Summer of Small-Caps” arguably has begun (as shown above), and the broader market participation has picked up markedly in recent weeks which has been helpful to market breadth. Notice in the picture below, going all the way back to 1980 how the Small-Cap index seems to be acting the same as it has in 1990, 2003, 2009, and in 2020:
Overall, as I’ve been discussing over the last week, I view this Technology pullback as being healthy. It’s important to also reiterate that the easing of the concentration in the “Magnificent Seven” is a bigger positive thanks to sectors like Financials, Discretionary, Industrials, REITS, and Financials kicking into gear. Furthermore, the move in Small, and Mid-caps has been very encouraging.
2 Scenarios look possible in the next couple days:
SPX rallies to 5525-5550, then stalls and turns down to recent lows into early August to form a larger cyclical low which the cycle composite suggests could be possible.
A rally right back to highs happens which necessitates initially a move over 5585. This can result in prices pushing up to 5569 and would be healthy for the technical picture. In this case, a rally to 5700-5750 could happen ahead of a larger seasonal setback in September.
Overall, despite this recent outperformance in Small-Caps, it’s still hard to make the call that either QQQ or S&P should move back to new highs right away. Elliott-wave patterns suggest that option #1 listed above very well might play out. Thus, what we could see is a bounce into the FOMC meeting, and then is given back into August. Furthermore, charts of AAPL, NVDA and TSLA don’t yet give conviction that they’re set to move back to new highs right away.
Regardless of which scenario plays out, trends and cycles look positive for gains into September ahead of a possible consolidation into Election-time. Ultimately, the point that I am trying to make in this week’s note is that I don’t suspect this will be an easy linear move higher in the back half of 2024. The move from October was quite amazing and was almost in a straight line except for a couple small and short-lived stumbles. Increasingly, the Tech-shakeup seems to be suggesting a tougher road ahead, which I feel won’t truly materialize in larger form until late September into October. The consistency of the dependency on their franchises and the magnitude of the global dependence on their businesses should cushion declines to a certain extent, but it is never easy or comfortable to weather these shorter-term bouts of consolidation in longer-term up moves.
To get into a bit of “hocus pocus,” I often pay attention to the cycles that are exhibited in the movement of the indexes. I use these much like monitoring crops and locusts. There is a seasonal / cyclical pattern that tends to be consistent over many years, but there is very little than can be done to adjust to changes due to assassination attempts or other “black swan” types of maladies. In looking at the cycle illustration below, it is seen in the pink cycle line that this short-term digestion could last till mid-August, followed by a burst back higher into late September before the election defensive action begins. This is only a projection and not an outright expectation, but we will be hyper sensitive to the increased probabilities that present themselves with these historical cycles.
Given the downward bias in cycles from September into November on many US Equity indices along with leading stocks which look choppy at best, In the short run, Small-cap performance is preferred, expecting that the broader market very well could outperform large-cap Technology in the near-term (and potentially over the next couple months) if the chart above should continue with the move off the low. In the longer-term, this broadening of the market could prove to be the market action that will solicit more of the $6 Trillion on the sidelines to find a home. Also remember, short-term money that is earnings close to 5% is generating an additional amount of cash on top of the Trillions already there, and it tends to look for growth opportunities instead of just short-term income.
The Russell 2000 (Small-Cap) vs. the NASDAQ 100 (QQQ) still shows excellent potential to push higher after the recent breakout that I have been mentioning. The relative charts of Russell 2000 (IWM) has continued to extend after having broken out vs. QQQ two weeks ago. This looks to be a very strong move and does not show any indication of exhaustion based on traditional technical measurements. Thus, additional relative strength looks likely out of IWM, and it looks pretty convincing that outperformance vs. QQQ can occur into next month. Technically speaking, I expect a retest of last December’s highs, and this very well might be surpassed.
Russell 2000 (IWM) / Nasdaq 100 Index Ratio
In the end, we seem to have a healthy economic environment. The election noise seems to be just that, noise. It is a strange way for the current administration to be acting, and even a stranger way for the current party to be bringing their candidate to the front, but as I’ve shown in previous notes, the markets really move based on far larger issues like currencies and interest rates.
There is really nothing that seems to be as important as the Olympics and boy oh boy do I love this Peacock station that lets me pick and choose just about anything I want to watch. The swimming has been great, the gymnastics is always great, even the table tennis and two-person beach volleyball have captured my attention. But the water polo and surfing are really what I’m into. I will continue to keep my eyes peeled for changes in the global financial markets, but what my gut tells me is to follow the yield on the 10-year US Treasury. If the yield moves remain quite calm yet directionally as expected (lower) this could be the indicator of our economy slowing but not recessing.
Notice the steady decline since May as compared to the steeper decline from October of 2023 till the end of the year. This gradual decline tends to give investors (both institutional and individuals) a chance to adjust in an orderly fashion. This move seems to be prepared to go under 4%. A move like this helps almost every part of the market as well as home builders and mortgage companies. I will keep you apprised.
- Ken South, Newport Beach Financial Advisor
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The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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