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Included in this report:
- The “everything goes up” market.
- Wishful thinking dominates market analysis.
- A crucial test for the S&P 500 is next.
- Only macroeconomists were surprised.
Weekly Summary (May 6–May 10, 2024)
- Stocks rose for the third week in a row after the recent correction.
- Bond yields remained unchanged in anticipation of April’s inflation reports.
- Commodities were higher due to gains in precious metals and grains.
- Following renewed pressures in the Japanese yen, the US dollar index was up.
The DBC ETF rose 0.7%, primarily due to gains in grains and precious metals. Gold (GLD) gained 2.7%. For the week, the U.S. dollar index (UUP) was up 0.3. Gold (GLD) has outperformed the SPY ETF since 2022 by a wide margin, with a return of 27.9% versus 13.5%, respectively.
The rebound in large-cap stocks (SPY) continued for the third consecutive week, with a gain of 1.9% due to better-than-expected earnings. Tech stocks (QQQ) gained 1.5%. Small caps (IWM) were up 1.2% but are still down 12.8% from their all-time highs. The high beta large caps (SPHB) gained 0.8%, while the low-volatility large caps (SPLV) surged 2.2%. The Dow Jones Industrial Average (DIA) ended the week up 2.2%. For the week, the magnificent 7 equal-weight index gained 0.7%, with the gains limited by a 7% loss in the stock of Tesla Inc. (TSLA).
The TLT ETF gained 0.3%, and it is down 7.7% year-to-date. Since January 3, 2022, the TLT ETF has been down 34.7%, while large-caps (SPY) have gained 13.5%.
The utilities sector (XLU) gained the most, 4.2%, on expectations of rate cuts in September due to a dovish Fed. This was after a 3.4% gain the previous week. Year-to-date, the utilities sector (XLU) is up the most, by 13.5%. The real estate sector (XLRE) is down the most year-to-date, by 5%.
The “everything goes up” market.
Stocks, bonds, gold, and the US dollar gained for the week. The last time all these markets were up for the week, with gold up more than 2%, was for the week ending September 1, 2017. A 5-month smooth uptrend in equities followed, with volatility collapsing until a correction started in 2018. Gold retraced about 12% in the following 12 months, but then a strong uptrend started with prices rising more than 70%.
The “everything goes up market” is due to rare alignments of fundamentals. Each time, the alignment occurs for different reasons. In this instance, strong growth is boosting equities; expectations of ongoing disinflation are supporting bonds; geopolitical uncertainty is driving up gold; and problems with the Japanese yen are boosting the US dollar. This is not a sustainable alignment, and there will be a decoupling of these markets soon. Macro-driven traders should be more careful than technically-driven ones because the change in regime could be sudden and unpredictable.
Wishful thinking dominates market analysis.
In our opinion, market analysis becomes even more useful when it attempts to clarify misconception and dominant wishful thinking about market opportunities. Wishful thinking is a bias that frequently arises when attempts are made to identify profitable reversals in prevailing trends. The financial blogosphere currently exhibits this bias, as exemplified below. The question is not whether the trend will eventually reverse, but rather how painful it will be while it does, and the fact that, in most cases, the expectation is not based on sound analysis but is the result of a bias.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. 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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