/ November 18 / Weekly Preview
-
Monday:
NAHB Housing Market Index (44 exp.)
---
Tuesday:
Building Permits Prel (1.43M exp.)
Housing Starts (1.34M exp.)
---
Wednesday:
N/A
---
Thursday:
Initial Jobless Claims (223K exp.)
Philadelphia Fed Manufacturing Index (8 exp.)
---
Friday:
S&P Global Services PMI Flash (55.2 exp.)
Michigan Consumer Sentiment Final (73 exp.)
-
Monday:
N/A
---
Tuesday:
Walmart WMT
Lowe's LOW
Keysight KEYS
Powell Industries POWL
---
Wednesday:
Nvidia NVDA
Palo Alto Networks PANW
Snowflake SNOW
Nio NIO
TJX Companies TJX
Wix.com WIX
---
Thursday:
Deere & Company DE
Elastic ESTC
Intuit INTU
Ross Stores ROST
---
Friday:
N/A
Pause and Reset
Last week, the market encountered some turbulence, amid rising interest rates and a feeling that certain sub-sectors got too extended to the upside, too fast. The S&P 500 and all major indices fell more than -2% on the week, cementing the idea that the post-election enthusiasm has encountered a stern reality check. In the case of the Russell 2000, tracking the most economically sensitive stocks (small caps), the weekly close was particularly brutal, with a -5% drop. Despite this retracement, the Russell 2000 is still up +1.9% since November 05, keeping the upside bias intact.
Technically, SPY has now “closed the gap” created by the post-election rally (a technical gap represents portions of the price scale where no open-to-close values have been recorded). In that sense, the next “gap close” would potentially set up the market for a reflexive rally in the next period.
Basically, the “Trump Trade” that went into full swing earlier, simply got ahead of itself. The result has been a healthy dose of consolidation and profit taking that did not violate any meaningful level so far. Investors which are betting on tax cuts, tariffs, and deregulation are probably becoming aware that these policy initiatives take time to fully translate into EPS growth.
Enthusiasm for crypto has been immune to profit taking so far, with the price of Bitcoin remaining stable throughout the week.
From a Market Internals perspective, the good news is that Dollar Transaction Volume remains on the elevated side, as traders have been very interested in chasing the rally. All things being equal, improved liquidity conditions should help reduce volatility, which, in turn, should translate into higher prices eventually.
Now that a good part of the previous overbought conditions have been reversed (at least in the short term), we can conclude that a “reset” has been achieved. Such is evident from our sentiment reading, now in distinctly “Neutral” territory. Such a disposition is fine in the sense that it allows investors to continue adding to positions, without being overly concerned that they are overpaying for stocks.
However, that doesn’t mean that speculative activity does not exist. Aside from the major boom in crypto (which is still going strong for Bitcoin), nothing denotes investor exuberance like the flows into UN-profitable technology companies, like the ones included in the Millennium Vision Strategy.
Check out the P/L’s recorded in this side of the market! This portfolio now holds a “triple” and at least two “doubles” : RKLB (Rocket Lab USA), AAOI (Applied Opt) and BE (Bloom Energy Corp). Again, these are all EBITDA-negative companies. Yet the strategy is up +15% since November 05, on par with its similarly speculative benchmark, ARKK (ARK Innovation ETF).
“Meme” stocks like GameStop (GME) have popped as well, with many retail traders forgetting the near wipe-out they collectively suffered in 2022 (it may also be that those traders are no longer around). The point is that despite the profit taking and last week’s selling, a risk-on mentality is alive and well, especially in speculative corners of the market.
Retail investors are not the only ones going “all-in” on the Trump Trade. According to BofA, professional investors have also increased their equity allocations to the highest exposure level in 11 years.
Renowned analyst Ed Yardeni has recently raised his forecasts for the S&P 500, lifting his call to 10,000 for the close of the decade, at the end of 2029. Previously, on Oct. 18, his forecast was 8.000.
In the near term, his estimates call for the S&P 500 to end 2024 at 6100, reach 7000 in 2025, and 8000 in 2026. Yardeni expects the market to hit 10,000 in 2029, which will be the first year on the job for whoever succeeds Trump as president. This implies a ~7% CAGR for the next 5 years, in line with historical returns, but much lower than the market’s current 21% CAGR (on a 2 year basis).
The chart below illustrates Yardeni’s projection, assigning a $670 target for September 2025 and implying a 18% CAGR to smoothly connect to the present day stock price.
Concerning longer term outlooks, it’s useful to remember that similar projections have been peddled by analysts at each major market top. Economists tend to believe that economic growth continues uninterrupted into the future. Unfortunately, reality is also a “thing” that can and often does produce some less than desired outcomes. When those outcomes clash with reality, it’s always prices and valuations that collapse in order to make up for the loss of growth.
The chart below illustrates why we use the lower trend-line (Z-Score -1) of a stock’s technical price channel in order to set major Stop-Loss levels when in an up-trend. Corrections below this level can be unforgiving for longer term portfolio returns.
Our Trading Strategy
Despite the valuation concerns and last week’s consolidation, we remain optimistic and fully committed to equity risk for the next couple of months. Unless a major “event” occurs until Trump’s inauguration — which is unlikely — there are 3 supply / demand forces which act as tailwinds to stock returns:
Corporate share repurchases
Performance Chasing
Momentum
This week, all eyes will be on Nvidia’s earnings call on November 20. Other than that, the week appears smooth, with few catalysts before the Thanksgiving break. Pullbacks should be shallow from here on out, as under-allocated investors will most likely play “catch-up” into year end.
Once we pass the inauguration date, we can assess what policies will likely be enacted by the Trump administration and adjust portfolios accordingly. Until then, we’ll compile a brand new bottom-up analysis of the top-10 S&P 500 stocks and see if we agree with Ed Yardeni’s projection.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!