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Approaching all-time highs

As we near the end of 2023, investors can look back on this year's massive rally and wonder why they were so worried about all the talk about recession and inflation. It is hard not to fault investors as market pundits, economists, and news media have told them for over two years that a recession was inevitable and inflation would take down the markets. As it sits now, the S&P 500 is well over 25% on the year, while the Nasdaq is an astounding +53% on the year. Unfortunately, many investors were quite bearish and missed the current market rally.

From a year ago, when markets hit their lows, our algorithms and data points painted a different picture. When market pundits assured us that the S&P 500 would take a nose dive into the 3000 region, we saw the beginning of a new bull rally. We blogged about it in October 2022. You can read about it here:

A contrarian bounce is coming.

Santa has come early for the markets. This month, the Feds have come down on their hawkish stance that they would not raise rates further. And to top that off, this week, investors received another holiday treat, with the core personal consumption expenditures (PCE) price index decreasing from 2.3% to the Fed's target of 2%. Friday's Core PCE numbers solidify that a Fed rate cut is coming.

Big Picture

All major markets are in party mode.  The S&P 500, Nasdaw, and Dow Jones ended this week on eight weeks of positive gains.  Small caps (IWM) is now pushing higher and closed out on a six-week win streak this week.  And as markets encroach on their all-time highs, it is not a matter of if but when.  And it could come right around the time of the Santa rally.  Looking at the image below of the S&P 500, it is hovering right below its all-time high.  It is above its average trend lines (blue and yellow).

Big Picture

Market Breadth

Market breadth has been poor for most of the year.  While the near-term and intermediate-term data points have oscillated between bullish and bearish, some core data points, such as stocks above their 200 EMA, have been bearish.  It has only been recently that that has changed.  While this bullish cross-over did occur this month, we will have to wait and see if this trend continues to improve.  While most of 2023's rally has been essentially prompted by the magnificent seven, a broader market rally would be a tailwind for investors coming into 2024.

Market Breadth

Market Sentiment

Investors have quickly turned into Fear of missing out (FOMO) mode.  For the past month, our market sentiment index has been reading greed, with November's reading hitting a +70 reading.  It is hard not to notice an investor's sentiment when one watches what is occurring with the current rally.  However, sentiment cannot stay this elevated for so long, and market sentiment will ultimately revert to the mean at some point.  The last time market sentiment rose this quickly and stayed for this duration was right before the beginning of 2022.  And we know what happened after that.

Market Sentiment

Market Outlook

Markets are pressing into the new year and challenging their previous all-time highs.  Investors putting on their bull suits are anteing up for the bull market that started last October 2022.  The only concern is that every rally that takes us up to and ultimately over the all-time highs adds to the current overbought condition.

SPY

SPY is poised to take out its all-time high setback in 2022.  SPY rocketed to break through multiple resistance after receiving its weekly bullish buy signal on 10/30/23 and its monthly buy signal on 11/1/23.  It is not a matter of if it will break through to its previous how but when.

SPY

QQQ

QQQ is sitting near its all-time high, and like SPY, it will eventually break through.  While it did range during the fall months, it rallied after receiving its monthly and weekly bullish buy signal in November.

QQQ

IWM

Small caps have been ranged bound for most of the year, and just this week, it is looking at challenging resistance in the 194 region.  This region of resistance was broken back in August of 2022.  IWM is now attempting to make a breakthrough in this resistance area.  IWM is now up +17% for the year, and it can give thanks to the last weekly and monthly buy signal it received in October of this year.

IWM

Concluding

2023 has been a strong year for the U.S. financial markets.  Large-cap tech, in particular, has been the winner this year after taking a nose dive in 2022.  The expectation many are putting into 2024 is that markets are poised to continue this year's rally.  Small caps have all but fallen behind the rally for most of 2022.  However, small caps are poised to rebound and could start outperforming the S&P 500 and Nasdaq as they did during the Covid rally.  With most investors turning bullish and even bearish pundits now reversing course and going all in on the bull market, could we see a possible pullback?  Markets on the daily technical readings are highly extended in the overbought condition, and the weekly timeframes are now approaching the point where there is a potential for a pullback.

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