/ November 06 / Weekly Preview
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Monday:
N/A
Tuesday:
A host of Fed Speakers
Wednesday:
Fed Chair Powell Speech
Thursday:
Initial Jobless Claims
Fed Chair Powell Speech
Friday:
Michigan Consumer Sentiment (64.2 exp.)
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Monday:
Alteryx AYX
Diamondback Energy FANG
DISH Network DISH
NXP Semiconductors NXPI
Vertex Pharmaceuticals VRTX
Vimeo VMEO
Tuesday:
Bumble BMBL
CarGurus CARG
Coty COTY
D.R. Horton DHI
Gilead Sciences GILD
GoPro GPRO
Mosaic MOS
Rackspace Technology RXT
Squarespace SQSP
Uber Technologies UBER
Upwork UPWK
Wednesday:
Arm Holdings ARM
Walt Disney's DIS
Affirm AFRM
AMC Entertainment AMC
Corteva CTVA
Diodes DIOD
HubSpot HUBS
Jazz Pharmaceuticals JAZZ
Lyft LYFT
Ralph Lauren RL
Under Armour UAA
Twilio TWLO
Thursday:
AstraZeneca AZN
Becton, Dickinson and Company BDX
Capri Holdings CPRI
Illumina ILMN
Novavax NVAX
Tapestry TPR
Unity Software U
Friday:
N/A
The Fed Pauses
If there’s been one takeaway from last week, it’s been that the Fed is likely done with rate hikes. On Wednesday, Jerome Powell’s speech ignited a broad rally in stocks, bonds, gold and commodities as market expectations for further rate hikes collapsed, and with those - the relative strength of the US Dollar.
The message coming from the Fed is not new, and it simply confirms what we’ve been saying for a while - namely that the market has been doing the work for them and higher Treasury yields in combination with lower stock prices have slowed economic activity and inflation. Of course, they did leave open the possibility of another rate hike, but the market saw through that message. Right now, the prevailing view is that the Fed is done raising interest rates.
From a market perspective, this means that the next moves will be pauses or cuts in the target rate. Bonds surged on this interpretation, and with them, stocks staged a spectacular reversal, SPY closing up almost 5% on the week. The benchmark ETF is now trading above its 200 and 50 day moving averages, and broke above R1 resistance at $431.
SPY Analysis (standard technical)
The MACD Signal has reversed sharply;
Our view is that above $431, trend following models will become buyers on weakness. This is a neutral juncture, where both “trapped longs” as well as momentum chasers have an opportunity to trade. On one hand, higher prices beget higher prices: we are now set up for a year-end rally, as the best 6 seasonal months for equity performance commence. From a historical perspective, the S&P 500 index rallied 71% of the time with a 5.1% average annual return from November to April:
If, on the other hand, an investor has been carrying an uncomfortable level of risk (and had that sudden realization on last week’s Extreme Fear sentiment), then now is a great time to reduce some of that risk. This is the kind of counter-trend rally where it’s advisable to scale down exposure, if the allocation model requires it.
So far, the rally in equities has been powered by extremely pessimistic levels of sentiment. As the chart below demonstrates (Market Internals / Sentiment), the market is now trading in neutral territory, as sentiment has improved sharply from last week. The train to buy on weakness has truly left the station.
The rally into year end is likely not just from a technical perspective, however. Professional managers need to allocate capital for year-end reporting, a period which coincides with the November-December window. Per GS:
“Goldman estimates that we should see $2.5 billion per day coming to the market in November in terms of equity fund inflows. Add buybacks estimated to run at close to $5 billion per day at peak later in November. And then potentially add to that the more than $100 billion in short positions that CTAs might have to reverse.”
The way we see it, odds favor the bulls at this juncture. So how far might the rally last and where / when is the time to sell? To answer this question, we turn to our fundamentally tuned chart for the SPY, derived from our DCF analysis and historical growth rate for the most important constituents. This is a chart with a $457 Price Target and 7% CAGR, according to our late August report and probabilities.
The conclusion: if we get close to $468 by year-end, it’s time to sell. Of course, we may not get there at all, and certainly not in a straight line, but the exercise proves valuable in the sense that we can have an exit plan as well.
First, prices need to stay above $431 so the current technical base is properly consolidated.
Another Historical Perspective
Does a 7.8% advance by year-end seem far fetched? In fact, it has happened before - twice! It’s quite a rare event for SPY to register 3 negative months in a row, such as has been the case in August to October 2023. Carson has compiled a table of scenarios from previous instances where the August - October period has been negative in each of the 3 months.
It turns out November is always a positive return month, December has an 80% probability of being positive as well, and the average return by the end of the year is 4.5%. In 1952 and 1990, returns have exceeded 8%, while only in 1957 the return was negative.
Of course, stocks rallied on the back of lower yields to begin with. On that note, bonds are now an investible asset class again, with TLT rising above its M-Trend level, which has acted as a STOP-LOSS.
Our automated strategies will surely take note.
High yields have been the primary driver for U.S. Dollar demand in 2023. Unsurprisingly, lower yields translate into lower demand for the U.S. Dollar. The Dollar has broken its 20-DMA minor support and is now on the cusp of registering a more important technical breakdown. There are several levels offering support just below, so a consolidation pattern is more likely at this point. However we think there won’t be a total capitulation in the dollar just yet.
Our Trading Strategy
With the market rebounding sharply, we now find ourselves in a neutral state. Depending on the goals of each individual, a portfolio rebalancing can be enacted this week.
If an investor has been over-allocated to equity risk, now is a good time to lower that risk exposure. Conversely, if an investor has been under-allocated to equities, buying on weakness in anticipation of a 2-month rally also makes sense here. There is enough technical and historical evidence to support such an outcome.
We do concede that markets are overbought in the very short term, and consolidation is more likely this week than another rally. There are a host of Fed speakers lined up from Tuesday to Thursday, including Chairman Powell. Their comments might temper bullish enthusiasm.
A lot of influential companies are still up to deliver quarterly reports, including UBER on Tuesday and Arm Holdings on Wednesday.
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