Why Even Bulls Need to Rest: Market Caution Ahead | S&P500=5000

While our OHFG investment team has been decidedly positive and bullish for over 15 months, with the S&P 500 already nearing our in-print forecast of 5000 for 1h24, I feel compelled to throw up a yellow caution flag here. Yes, the markets can continue to move higher throughout the first half of 2024. Our team has publicly discussed 5150 to 5200 on the cash S&P 500 not being out of the question.  As discussed, numerous times the last 15 months, the markets, particularly the NASDAQ index, which is very heavily weighted to tech stocks, since the October 2022 lows, continue to follow the path of the great Dot.com internet run that spanned from October 1998 through late March 2000.  While others have shouted for market crashes, we didn’t that as likely at all and saw the setup as very positive including into late October 2023 low on the S&P 500 near 4100.  Which was so far, the last big buy as we have now rallied over 800 points.

At this point, I believe caution is warranted over the short term.  Bearish views, no? Caution, yes?  Hence the title of this week’s episode, Even bulls need to rest, usually in February.  Why? Let me step through a few of the reasons over the next couple of minutes. First an update of a few charts that most of my friends and business associates for over a year look at nod and move on from quickly.  First the overlay of the Nasdaq composite index, which is largely the large cap tech stocks, since October 2022 through Feb 2nd and the October 1998 through March 2000 top during the early internet build out excitement.

Graph: Nasdaq Composite Index

The overlay continues to be unbelievably tight.  Even to having a short term trading buy on the Nasdaq for MOC on Wednesday January 31st as the NASDAQ also pulled back in late Jan 2000 into a short term buy.

The S&P 500 overlay has diverged a bit in the last 2 weeks from early 2000 pattern and I’m pretty sure I know the reason. First here’s that updated chart.

Chart: The S&P 500 Index

It’s the index weights in the S&P 500.  Today those weights are even more skewed toward technology, communication, and growth stocks such as Amazon now than they were in 2000. Those groups accounted for nearly 35% of the S&P 500 at the peak of the Dot.com bubble in 2000 while right now, those groups and names are quickly approaching 45% in today’s market. With leadership in 2023 looking a lot like 2023, the S&P 500 did not pull back in late January.

But Chris, if the overall markets are hitting new ATH’s why should one be increasingly cautious in the short term?  For these answers I’m going to reference a few of the same technicians and market historians I gave props to last week.  First off, even during the great Dot.com run of 2000, February was a month of volatility.  More specifically, back then the markets peaked on the second Friday of February and sold off into month end.  The Nasdaq index dropped about 5% peak to trough and the S&P 500 dropped about 7.5% before resuming their run to new ATH’s in the first half.  The second Friday in February happens to be today.

It also happens to be nearing the window for insiders at corporations who are locked up from selling stock during most of the quarter, to open and allow them to sell in the open markets for the first time in 2000.  If you were an insider at AMZN, Meta, MSFS. Wouldn’t you be interested in selling some stock given those moves and you are in a new tax year?  I would.

Behind the scenes, things aren’t as rosy in the overall markets as the S&P 500 and NASDAQ are saying.  As J.C Parets noted about a week ago, divergences throughout the markets are starting to get bigger and add up in anegative manner. Here are two chart’s he points to: The first is a chart of the breadth of the market as measured by S&P 500 stocks above their 50-day MVA’s versus the overall S&P 500.

chart of the breadth of the market as measured by S&P 500 stocks above their 50-day MVA’s versus the overall S&P 500.

Since mid-January, there has been a sharp falloff in the number of stocks with positive chart profiles vs the number with negative profiles. All the while the S&P 500 has made new ATH’s.  This is called a negative divergence and throws up a big yellow caution flag.  For what its worth, this is the same measure J.C. used in early 3q2022 to call the bottom in the market for his clients.  Back then, the number of positive charts were growing, while the S&P 500 was making new lows on that big move lower in the first half of 2022.  That was a “positive” divergence and got J.C bullish, and right, long before most others.

A second warning flag our team has noted the last 2 weeks in podcasts and J.C. throws up in his latest work is the divergence of the DXY Index, the broad dollar, and the S&P 500.  Recall back in late October, when we expressed optimism for a strong 4q23 rally because the dollar had begun weaking versus other currencies.  A gently weakening dollar is most often a sign that investors are broadening their desire to take risk as, like it or not, doomsday dollar calls or not, the Dollar is still the reserve currency of the world, and investors run toward it, not away from it, when they are scared, or taking less, not more risk.

US Dollar Index chart

The first week in February, the dollar had a strong move up even though the stock indexes continued higher. But investors, it’s another yellow flag short term.

We’ve discussed market seasonality many times before using data from Steve Suttmeier’s group at BAC Securities. Historically speaking, February is one of the worst months in the first half of the year.  Maybe Don McClain was long stocks when he sang “February made me shiver” in his hit song American Pie?  Here’s is Steve’s great table for 4th year Presdeintial election years.

Chart 1928-2024 Stock Market Returns by month and year

As one can see, there are ot a lot of great Februarys for stock market returns historically.

As for Larry Williams and his thoughts on this time of the year, and stock returns, here is Larry’s very long-term daily cycle projection for 2024.  This has been taken from Larry’s 110+ page 2024 Forecast.  You’re looking at the red line for the projection of path in 2024.  The black bars are the actual market price moves since last June.  This cycle chart called the 4q23 rally almost to the day.  Having a short-term peak this week, for the last 3 weeks of February before reaccelerating up to more new ATH’s is spot on with Larry’s historical cycle work.

Chart from Larry Williams

Finally, I’m going to leave you with one more chart that screams to our team, short term caution.  This is the chart on 10-year “Real Interest rates”.  That’s the rate that has most control of forward PE ratios that investors are willing to pay for stocks.  It had has positive in late October when others were speaking doomsday and crashes, and now its telling our team, proceed slowly and with caution as this interest rate has historically pulled down stocks particularly the large cap growth stocks when its trending higher as it has started to recently on the back of all that great, and quite sketchy, government jobs data.  But that’s rant for another day.

Chart on 10-year “Real Interest rates”

Investors, thank you for taking the time to watch this week and I hope you forward this link to your friends or others with an interest in the financial markets.  It’s exciting to follow up last week’s piece, which was “Technically Speaking”, and a shout out to a group of analysts we follow, with a follow-up piece showing you what data we are keying off of that rarely shows up on TV.  For the whole team here at OHFG have a blessed week and a fantastic February. Our team is actually hoping that this February is quite “normal” and it makes others shiver to give us lower prices and good buying opportunity for OHFG clients.

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