We are two months into 2024 and we’re back to a very separated market – meaning only a select few segments of the stock market are positive, while others (Small Cap stocks and much of the bond market) are negative. But that doesn’t (yet) mean that the market trend isn’t still to the upside. At least for the S&P 500, which is being held up (again) by a very small selection of Technology stocks.
As we’ve said the past couple of months, the seasonality of Election Years tends to be choppy and sideways until May. But on a shorter timeframe, the second half of February tends to include a couple of the more difficult weeks of the year for the broad indexes. We think it is possible that the few strong market segments could quickly give up their year-to-date gains before the month is over. That is one of the factors that has us at a reduced market exposure until this season is over.
The Federal Reserve has now paused the raising of interest rates and they have suggested that they will eventually be lowering rates. They’re just not sure when, and the guesses are all over the place. What seems reasonable to us would be around June or July, but there are many factors that could influence when that happens.
Our Shadowridge Long-Term Trend indicator remains positive since its signal in the middle of November. This gives us hope that if we have a market pull-back of maybe 5% or so, that would only be a short-term correction or pause before resuming the longer-term up-trend.
Our Mid-Term Cycle went back to positive recently after a brief period of being negative in February. In January, the data got so negative that we expected to see a bigger market sell-off (but we didn’t). And while the Money Flow indicator is positive, it’s not strong enough to suggest we be more aggressively invested.
As of Wednesday night (February 21st, 2024), our Shadowridge Dashboard showed Positive to Negative market sectors as 9 to 2. Energy has finally moved to the strong side, while Technology and Real Estate are the two weak sectors. Longer-term, we’re looking at being in the Energy sector sometime in late spring, based on the seasonality of oil prices, as well as stocks in that segment. Stay tuned!
This month’s chart is one I shared on “The Final Bar” with David Keller, CMT (he’s awesome, by the way). It shows the Bullish Percent Index of the S&P 500. This is a sentiment indicator of the overall index. When it peaks at or near 80, that tends to be a short-term top (see the vertical red lines). But, for some reason, the peak at the beginning of 2024 steadily weakened while the S&P 500 index continued to rise. When these disagree, we have a divergence. And eventually, the weakness in the data is the one that (I find) tends to be correct.
The past 2 years of the S&P 500 Bullish Percent Index above the S&P 500 Index (Source: StockCharts.com)
The Bond Indexes (both the Aggregate and the 10-year Treasury) are back to struggling as they did in 2023. Both indexes, which should be considered a “safe” part of a portfolio, are down year to date about -1.8% and -2.25%. Again, these indexes are not helping investors who use them to “diversify” or for “safety.”
Bottom Line: Like last month, we’re still concerned with market health in the near-term, but we remain optimistic for the year to end positive by the time it’s all over. And while we expect the election to be a factor in market activity, that is still months from now. As we said in previous months, election years do tend to be positive. It just may be an interesting path to get to that point.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.