Ride or Die!
It's time to see if the Christmas Rally has Legs
The market is pricing in multiple cuts to the Fed Funds Rate in 2024. Although it’s up for debate whether or not that is feasible, the idea of multiple rate cuts provides the Macro Fuel that is powering the market upwards. Persistence makes trends and the availability of investors and traders who are willing to buy every dip on this rate cut narrative makes this rally strong.
This week on Wednesday 12/13 there will be an FOMC meeting and rate decision and Friday 12/15 is options expiration. These two events are historically volatile, but that volatility can move the markets up to the next level or back down to support. Our cycles expect the Christmas Rally to begin around 12/13 so, in the words of Vin Diesel in The Fast and The Furious, its Ride or Die time for the markets.
Technical Analysis: Overbought Can Stay Overbought for a While
The best way to Make Money is to surf inclining 8 and 21 exponential moving averages (EMA), which are the pink and blue lines in the daily chart below. And that right there sums up the price action in the S&P 500 (SPY) since early November. Pullbacks to the 8 or 21 EMAs could be bought with positive expectancy right now.
Oscillation indicators like the Stochastics and the Relative Strength Index (RSI) show that the SPY is “overbought”, but it doesn’t necessarily mean a drop will occur, especially in a strong momentum market. Last week, on every dip, the market found buyers, and a lot of them, evidenced by the large volume bars in the chart below. The Commodity Channel Index (CCI) indicator comes in handy to show changes in trend, which only occur when the indicator crosses the 0 mark. We can see that no such thing happened. Odds are in favor of another leg up as the Money Flow Index (MFI) was able to reload at the 50 mark and turn up again. If you look left on the chart, you can see that the 50 mark on the MFI has often signified completed pullbacks in uptrends.
Sometimes all you need is a little perspective. Looking at the weekly chart of the SPY below, all of a sudden the same indicators don’t look so overbought. The MACD and MFI look like the uptrend is just beginning. The Stochastics indicator does look overbought, however, this indicator tends to get in The Grind, a state when it is technically overbought but stays overbought for a while as price grinds higher. SPY is also forming a cup and handle pattern on the weekly chart and if this triggers, it is possible that the target of around $580 could be hit. Of course, there is no guarantee this will happen.
The Nasdaq 100 (QQQ) may be done with its mini-pullback, as it broke the downtrend line. The Stochastics indicator shows that it is ready to start another leg higher.
The other main indexes, the Dow Jones Industrial Average (DIA) and the Russell 2000 (IWM) seem to be forming flags, which could be seen as continuation patterns for more upside.
Cycles: A Possible FOMC Twist
This week there will be an FOMC meeting and a Fed Funds rate decision on Wednesday, December 13th. Although this could bring some volatility, it could also be the fuel that powers the Christmas rally upwards. Our cycles for the S&P 500 show a slight pullback, which should bottom around 12/13, followed by a strong rally.
The cycle chart for the 10-year Treasury rate supports this possibility as it shows some upward action (rising rates = downward pressure on stocks) until 12/13, followed by a drop.
If interest rates dip, the Magnificent 7 may retake the rally’s leadership during the next leg up. This is something to keep an eye on.
Market Internals: Strong Breadth + Low Volatility = Grind Higher
Stock market breadth, measured by the Advance-Decline Line (ADL below), is very strong. As we mentioned in previous articles, the rotating leadership and broadening breadth can prolong the rally. Meanwhile, volatility (VIX) is declining and hitting multi-year lows. The last time the VIX was this low was in January 2020. It’s important to monitor these market internals for reversals, but right now the combination of strong breadth and low volatility creates an environment where both fund investors and stockpickers can be profitable.
Intermarket Analysis: Still Supportive
The Intermarket picture is still supportive of a stock rally as the 10-year Treasury rate, US Dollar and oil are all downtrending below the 21 exponential moving average (EMA).
Player Analysis: Can’t Open the Trapdoor Yet
The AAII Bulls & Bears sentiment indicator hints that the market has gotten too bullish.
Furthermore, the Fear and Greed indicator shows that the market has gotten greedy. However, this greedy state can last for a while as the market Grinds higher. For example, the S&P 500 stayed in the Grind moving higher for over a month in Jan/Feb and about a month and a half in June/July despite oversold readings. We may be starting a multi-week or multi-month grind higher now.
Keeping the market afloat is the high number of retail puts outstanding. Market makers will have to pay retail traders if the market goes down, so they will try to keep the market afloat until these retail puts as washed out (sold or expire worthless). Until the puts are washed out, it would not be in the best interest of market makers to drop the market, as they would lose money. So for now the trapdoor remains closed.
Meanwhile, Smart Money continues to sit this rally out. They even sold more of their equity exposure to retail in last week’s rally. If they like what happens at the 12/13 FOMC meeting they may put some capital back to work. Perhaps Smart Money realizing it’s dumb to not make money in a bona fide rally fuels the next leg higher.
Conclusion: Get Ready to Ride
You have two days to prepare your watchlist and prepare to buy as the FOMC meeting on December 13th could bring the fuel to power the next decisive move. We believe that the event brings a pop to the markets or a pullback that will lead to a later pop. Either way, it’s time for the Christmas rally to begin and if that happens, you don’t want to miss out. Of course, the market could trick everyone and open the trapdoor, however, due to our Cycles and Players Analysis, we don’t believe this is probable. As we said earlier, it’s time for the market to Ride or Die!
Our Cycle Forecasts for 1Q2024 will be available on December 12th at 6 pm CST. The product includes a detailed Cycle Chart (with our “Secret Sauce”) for various Indexes, Cryptocurrencies, Commodities, Sectors, and The Magnificent 7 Stocks. These Cycle Forecasts will be updated 4 times a year (Q1, Q2, Q3, and Q4), providing a blueprint for that particular Quarter. We hope this guides you in your investing journey.
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.