The Bulls Are Back In Charge

As noted last week, the market managed to hold near the top of a V-shaped recovery, with Powell’s Jackson Hole speech sounding rather dovish and supportive of risk assets. A series of previously designated resistance levels (like the M-Trend, 50 and 20 DMAs) have been easily surpassed and the MACD signal has crossed over to positive territory, leaving only recent all-time highs as significant next resistance. Absolute volatility has somewhat subsided, but the VVIX (volatility of the VIX) remains elevated -- an uncommon element with markets so close to ATH.

There are only two negative elements to the advance: an absolutely dismal dollar transaction volume and a return to short-term overbought conditions. Unusually low volume tends to signal a reversal in the prevailing trend, not a continuation.

While these issues are not critical, they suggest it’s more likely we’ll get a minor pullback to support going forward. In theory, volume will pick-up once support is hit, and confirm the August correction is 100% over. This will provide a better entry point to add exposure to portfolios for an end-of year rally.

Two major events occured in the past week. First, the Bureau of Labor Statistics reported a massive negative revision of 818K jobs over the last year. Zerohedge provides a great analysis:

“As the chart below shows, the 2024 revision was the biggest in the past decade and the second biggest on record, with just the 824K downward revision in 2009 just (barely) greater.“

Normally, this would be a highly concerning negative catalyst, that suggests the economy is substantially weaker than the headlines would make you believe. However, the muted stock and bond market response suggests that investors were already well aware of this. As a consequence, the data release was basically ignored. Torsten Slok, chief economist at Apollo Global Management, puts the revision in perspective:

“160 million people have a job. […] Telling me that over the last 12 months it wasn’t 160 million, it was only 159.2 million is not making too much of a difference to how the Fed and financial markets are thinking about the economy.”

Secondly, a cooler labor market allows the Fed to pivot to a more accommodative stance much faster. That’s exactly what Jerome Powell hinted at on Friday, in his much awaited Jackson Hole speech:

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability.”

Translation: the Fed will not tolerate any further weakening in the labor market, as the approach to its dual mandate now becomes balanced. Battling inflation is now not the #1 goal. The market cheered the news, as fears that Powell could maintain a hawkish stance have evaporated.

With the rally on Friday, sentiment is now close to as optimistic as it has ever been in 2024. (Note: as 2024 has been a less volatile year, the 2-standard deviation readings that denote “Extreme Greed” and “Extreme Fear” are “tighter”)

Despite the elevated sentiment reading, V-shaped recoveries tend to be a bullish signal. Sentimentrader did an excellent analysis, which we have featured in our Daily Briefing:

“As shown below, rapid V-shaped recoveries tend to be bullish indications of both the end of the corrective period and the resumption of the bullish trend. Since 2014, periods that saw a sharp price decline, as measured by the 10-day rate of change, followed by a sharp advance, were bullish indications. However, as seen in 2015 and 2022, such a reversal does not preclude a secondary correction from occurring.”

“Stocks are already overbought on some measures, and sentiment is quickly recovering from the brief freak-out a couple of weeks ago. The run has been astounding, but past performance after impressive v-shaped bottoms suggests that there should be more gains in store over the next couple of months.”

Another alternate bullish signal comes courtesy of Carson Research in the form of the Zweig Breadth Thrust. Investing legend Marty Zweig developed this indicator to identify turning points in the market. The indicator is the 10-day EMA of NYSE Advances divided by NYSE Advances plus NYSE Declines. As the following chart shows, those breadth thrusts denote a continuation of the bull market rather than an end.

The median 12-month return following the triggering of this signal is +24%, with an impressive 100% win-rate.

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The added liquidity expected to arrive as the Federal Reserve and other central banks are beginning to ease monetary policy will surely support a risk-on rally in the year ahead, as will corporate buybacks.

That doesn’t mean the probability of a recession can be ruled out. Corrections will certainly occur along the way. From a purely risk-management perspective, however, bullish signals outweigh bearish ones at the moment and we must act accordingly. A mix of treasury and defensive positions in our portfolio can help hedge any expected volatility, especially in the months leading to the November election.

This week, the key market moving event will occur on Wednesday in the after-hours session, as NVDA will announce its quarterly results. We are still looking for a bit of a pullback in order to increase equity exposure, and, for now, the plan is to move slowly until we arrive at that opportunity.

Friday’s PCE Price Index as well as Personal Income and Spending data is also critical for the outlook of a 50-bps cut in September. By the end of next week (September 06) we will provide our updated price targets for the S&P 500 index, which will guide our allocation process going further. At the moment, the median S&P 500 index target for the end of 2024 compiled from major banks stands at 5,600 -- implying 0% upside from current prices in the near term.

Extrapolating the trend further into H1 2025 leads up to 6,100 in June’25, representing an 8.3% potential gain.

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