Jerome Powell took the podium for his press conference yesterday…
Chairman Powell is not doing any victory laps. He reminds us that there may be more hikes to come. The Chairman is also reminding us that rates aren’t going down this year.
And I hope not for a simple reason. At this point, a reversal of the Fed’s trend would be a reaction to the economy, and stock market, going to hell in a bucket.
Let’s just say that the Fed is done, and they don’t lower rates until March 2024. That puts the market in a potential sweet spot that may remind us of 2006.
To refresh, Ben Bernanke took the helm of the Fed in February 2006. Interest rates were already on the rise as his predecessor, Alan Greenspan, initiated tightening policy in 2004.
Inflation was running around 3%, just a little higher than now.
The S&P 500 ETF (SPY) was midway through the year with gains of about 2%. As is the case now, we were heading into the seasonally weak period that extends through August and September. Stocks complied with the seasonality – as I suspect they will this year – but then it was off to the races.
The S&P 500 snapped out of its summer slump and didn’t look back. The S&P 500 rallied almost 20% to close the year strongly. The Nasdaq 100 added more than 25% for the same period as investors flooded back into technology stocks.
Here’s the catch. Seasonality and the stretched breadth, or momentum, of the market.
Both the S&P and Nasdaq 100 are getting ready to hit the seasonally slow August and September.
In addition, the percentage of companies above their 50-day moving average just hit 90%.
Just like the market snaps higher when it’s breadth/momentum has been stretched too far to the downside (oversold), it snaps lower when the current conditions are met.
The fact that these two measures (seasonality and breadth/momentum) are aligned signals that you’ve got time to get your “bullish watchlist” ready. Of course, I’ll share mine which is focused on a few of the Best in Breed technology and small cap stocks.
July 27 2023