Prepare for the Spring Rally
Ready to Make Money?
After shrugging off hot inflation reports last week, Fed Chair Powell boosted the market on Wednesday as the Fed: 1) left rates unchanged, 2) expects to have three 0.25% rate cuts in 2024, and 3) stated that recent upticks in inflation do not change the larger trajectory of disinflation. The market celebrated with a broad rally with notable strength in Communication Services, Industrials, Technology, Consumer Cyclicals, and Financials.
The S&P 500 (SPY) increased 2.23% last week as the price of SPY bounced off the 10 EMA and hit the Upper Bollinger Band once again. The chart below shows a few bullish developments:
RSI broke out of its divergence
MACD made a bullish crossover
Net New Highs spiked, which is usually a sign that the rally can continue.
A pullback to the 10 EMA or 21 EMA could be a good starting point for the Spring Rally, which usually occurs before Easter and lasts until the end of April. Referring to the SPY Seasonality chart below you’ll notice that it’s time for the Spring rally and that April is often a high-return month of the year.
According to the Intermediate Cycle (typical uptrends of 18 to 27 weeks), the market has been in an uptrend for 20 weeks. With the positive macro picture, this Intermediate Cycle likely extends to 24 to 27 weeks or possibly more. That should bring us into late April to May before a higher chance of a pullback.
There is the possibility that the Spring Rally does not happen with retail call-buying at a high level.
However, we believe the supportive Fed and the trend of declining interest rates during an election year increase the probability of a strong Spring Rally. Next question…what do we invest in?
Communications (XLC): The Communications Services Sector ETF (XLC) appears to be breaking out and starting a new uptrend after consolidating for 30 trading days (45 calendar days). It is following a 48-day cycle bracket and started a new cycle on 3/18. There appears to be a lot of time to profit from this ETF before the cycle gets old around late May. RSI is up-trending and above 50, while the MACD just made a bullish crossover and is above 0. These are very bullish indicator readings. The Stochastics indicator is a bit stretched, so buying when this indicator makes a bullish crossover could pay off. This seems to occur every 9 trading days more or less and synchs with our work on the 2-Hour Chart Cycles. Note that the Stochastics indicator (5 %K, 2 Smoothing, 3 %D setting) is excellent for helping time entries. Entering a position on the 5 (black), 10 (pink), or 21 (blue) EMAs could be good entry points. A retest of the breakout point around $80.42 would also be a great entry. A stop-loss order under $79 should be sufficient. There could be a half-cycle pullback around 4/22, which could provide a buy-the-dip opportunity. The top of the channel around $87 could be an area to take profits, however, if the trend lasts until the end of May, this may be exceeded.
The chart below was taken from our Q2 2024 Cycle Forecasts for Sectors. It shows the Cycles Composite (blue), Energy Cycle (pink), and Seasonal Cycle (green) for the second quarter. Notice that all three cycles form a buy zone between 3/26 to 3/31 before cyclical energies provide a tailwind for XLC from 4/15 to 4/27. There could be a pullback, which coincides with the aforementioned half-cycle low. Cyclical energies could then encourage another leg higher from 5/8 to 6/7.
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