The weekly market reports include a stock market forecast and an analysis of capital markets. Access to the full report requires a Premium Articles or All-in-One subscription.
Included in this weekly market report:
- “Greed is good” and parabolic.
- The statistics of inflation uncertainty.
- The yield curve is inverted for longer.
- The US dollar index/gold correlation.
Weekly Summary (January 29–February 2, 2024)
- U.S. stocks were up on solid economic growth data.
- Bond yields fell, but uncertainty about rare cuts rose.
- Crude oil plunged on rumors of a ceasefire in the Middle East.
- The US dollar was up on expectations of higher-for-longer rates.
Due to rumors of a ceasefire agreement in the Middle East, the spot price of crude oil dropped 7.3%. The DBC ETF lost 3.5% due to its high correlation with crude oil. Gold (GLD) gained 0.9% for the week despite a stronger US dollar and the UUP ETF gaining 0.3%. Note that the correlation between gold and the US dollar remains negative but has rebounded significantly in the last 12 months, as shown in the Capital Markets Indexes section of this report.
Large-cap stocks (SPY) and tech stocks (QQQ) were up 1.4% and 1.2%, respectively. Small caps (IWM) fell 0.8% as uncertainty about rate cuts rose. High beta large caps (SPHB) and low-volatility large caps (SPLV) gained 0.6% and 0.7%, respectively.
Long-duration bonds (TLT) surged 2.8% but were off the highs of Thursday due to a stronger-than-expected employment report. Since 2022, the TLT ETF has been down 31.1%. In the same period, large-caps (SPY) have been up 7.4%, but with a maximum drawdown of 24.5%. Gold (GLD) has outperformed large-cap stocks in the same period with a gain of 10.7%.
The three major stock indexes—the S&P 500, NASDAQ-100, and Dow Jones Industrial Average—ended the week at new, all-time highs.
“Greed is good” and parabolic
“Greed, for lack of a better word, is good,” said Gordon Gekko in the famous 1987 movie “Wall Street.” This statement was descriptive and also predictive of the future of the stock market. Despite many corrections and significant investor losses, parabolic moves driven by greed and irrational exuberance have been the primary drivers of stock indexes reaching new all-time highs. Is this good or bad? We are not here to judge, but only to provide context.
Major stock indexes reached new, all-time highs this week after parabolic moves in a few mega-cap stocks. The stock of NVIDIA Corp. (NVDA), with a market cap of $1.6T, gained 8.4% for the week on expectations of higher earnings due to rising chip demand.
In the last four weeks, NVDA has gone parabolic. Note that, not long ago, in October 2022, the stock was down 66% from its all-time highs. Then the stock started rebounding, and in 327 trading days, the stock gained 453%. Let us next look at the stock of Meta Platforms, Inc. (META).
META, with a $1.2T market cap, surged 20.5% for the week due to beating earnings estimates and announcing a dividend. In 312 days since the bottom of October 2022 and a 76% drawdown from all-time highs, the META stock has gained 434%.
“Greed is good.” Greed also helps the stock market stay afloat. This market needs large-cap companies that can go parabolic because the breadth is terrible. The magnificent 7 stocks are up 140% since January 2023, while the equal-weight S&P 500 ETF (RSP) is up only 14%. In the case of the S&P 500, 212 stocks are still 20% below their all-time highs, and half the stocks are down year-to-date. For the week, a little more than half of the stocks were up. This is the reason that although the cap-weighted SPY ETF gained 1.4% this week, the equal-weight ETF (RSP) gained only 0.4%. In other words, “the trade is getting crowded.”
Experienced traders know that the trade can remain crowded for longer than any shorts can remain solvent. It is often a mistake to short a market that is going parabolic. However, the risks for longs are increasing, and when the selling starts, a stampede to exit from a small door will commence. Those who sell first and essentially provide the initial conditions for the stampede may exit with large profits, but many of those who exit later may face large losses. It is the usual zero-sum game: the losses of the losers become the profits of the winners. The message here is that when parabolic moves are occurring in the markets, it is probably the right time to increase diversification and/or lower risk.
Even a simple but robust forecast can provide a warning for exiting a parabolic market that has started showing signs of weakness. It may not be perfect, but it can minimize losses and preserve a good fraction of the gains from long uptrends.
Stock Market Forecast
A proprietary model generates the forecast. The model’s accuracy has been close to 100%. The model generates well-defined long entry and exit signals for SPY ETF. The model does not attempt to forecast exact tops and bottoms. The objective is to minimize losses due to large corrections and maximize gains in uptrends.
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Specific disclaimer: This report includes charts that may reference price levels determined by technical and/or quantitative analysis. No charts will be updated if market conditions change the price levels or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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