Into The Grind
Chasing Returns Before Christmas
The market rode to new 2023 highs on Wednesday’s FOMC meeting where the Federal Reserve Bank is expecting to cut rates next year. There we have it…the Fed Pivot! We didn’t know the narrative, but we knew that the bulls were in favor because of our cycles discussed last week. We hope our subscribers Made Money because not everyone did, as we’ll discuss in the next section. Our S&P 500 cycle chart below shows that there may be some sideways action next week, but 12/20 to 12/22 should be a good buy point before the Christmas rally. If you want to see our Cycle Forecasts for 1Q2024 you could buy them here.
The market is entering ”The Grind”, which is a term I use to describe a market that is overbought and extended, but it keeps grinding higher on greed. Market participants were rewarded for buying the dip and now they are willing to roll the dice and buy every dip. This past year we had two other Grind periods and they lasted between a month to a month and a half. Assuming the same thing occurs, that gives this rally legs until early to mid-January 2024, at which time a more meaningful pullback could be possible.
Player Analysis: Smart Money Starts Chasing
There is a saying on Wall Street that “Bears Sound Clever But Bulls Make Money”. Although it’s not always true, it has been since November. Smart Money could have been analyzing the historic behavior of yield curve inversions, the low equity risk premium, or the effects of higher interest rates on the real estate sector. Whatever it was, they sold equity exposure prematurely to Dumb Money (us the little people or “Retail”) and were probably hoping to buy on a significant pullback. They never got their pullback. With the Fed Pivot, they finally have a Macro reason (Macro Fuel) to buy in. You can see from the chart below, that Smart Money began chasing last week. If the market is going up, they want their Christmas bonus (“Christmas Ham”).
Smart Money entering the market could be “Trap Fuel” for a continued rally. We could also see that there are still too many outstanding puts, thus it is likely that this rally will continue until the puts throw in the towel. When retail bets on the market dropping, the market does not drop.
Market Health: Keep on Surfing
The market is healthy indeed. The S&P 500 (SPY) trends higher on the 10 exponential moving average (pink line). Thursday and Friday had many traders cashing out evidenced by the volume spikes below. However, they were met with buyers as evidenced by the small range “Doji” candles, which are a sign of indecision. It is possible for the SPY to pull back to the 10 EMA at $464. The options market is pricing in a $5.61 move for the SPY to next Friday 12/22. This provides a range of $474.95 to the upside and $463.71 to the downside. This is something to keep in mind as the week-end price falls within these options derived ranges 65% of the time. Of course, a pullback to the 10 EMA should be seen as a gift and could be bought with a high probability of success.
There are a lot of recent call buyers, and this could slow down the market’s ascent. Remember, whatever people want, the market wants to do the opposite, like a difficult child. Counterbalancing this dynamic is the strong breadth as measured by the Advance/Decline Line (ADL), which is still in an uptrend despite taking a breather. Fear is non-existent right now as evidenced by the low Volatility Index (VIX). Net New Highs are strong and growing telling us that this is a stock-pickers market. Our year-end target for the SPY is $484 (Fibonacci Pivot Point) or $480 (January 2022 high).
The Intermarket picture is still supportive of the rally. Interest rates continue lower. The US Dollar and Oil are experiencing slight bounces, but are still trending below the 21 EMA (blue lines below). Our cycles expected slight bounces or choppiness in the USD and Oil, and you can read about it here. Until there is a break of the 21 EMA, there is no reason to be alarmed.
Technical Analysis: Index Setups
We discussed the S&P 500 in the Market Health section. Let’s go over the other indexes.
The Nasdaq 100 (QQQ) is in a rising channel. Price could continue marching higher to the $420 Pivot Point, which is our target price for year-end. Alternatively, it could pull back to the 10 EMA or bottom channel line around $397, before resuming the upward climb.
The Russell 2000 (IWM) is at the upper channel line and is pulling back. The channel midpoint line around $193.50 is a reasonable place for the pullback to end. It has confluence with the 5 EMA and would also be a gap fill. It could continue lower to the 10 EMA around $189. The Pivot Points at $205 or $217 could be year-end targets.
The Dow Jones Industrial Average (DIA) is also in a rising channel. A pullback to the 5 EMA at $370 or lower channel line around $369 could be areas of interest where buyers step in. The year-end target is $380 or greater.
Conclusion: Nothing Changed…Buy the Dip
The market is strong and with new Macro Fuel from the Fed, this rally will probably continue, even with a possible pause or pullback. Smart Money plans to join the fray, so they will be ready to add equity exposure on weakness. Be ready to buy on dips as the Christmas rally is right around the corner:
We’ll go over some great setups in the Premium Content section.
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.