Summary: The point is that there are large disagreements among short-term indicators, in line with an uncertain market. Taken within the context of the stronger, long-term body of evidence, it makes sense to ease up here, build a shopping list of candidate stocks or growth funds, and wait for clarity in the post-election world.
Even top professional athletes take breaks, and that includes right after setting records or highs. While the stock market may have struggled over the past few days, it is just one week removed from its own high. Indeed, with the S&P 500 setting four new highs in October alone, it does deserve a little breather. Not only is it to be expected, but within the context of an intact bull market, it is likely the pause that will refresh.
It is also important to consider that many key Research indicators have set all-time or multi-month highs along with prices. Breadth statistics across the capitalization spectrum have supported the advance, and a healthy investing environment. The “tide” was indeed rising, and even with recent volatility, it still is. Independent measure of breadth and Demand across the all-stocks database reached a 10-month high on October 17. This was the most robust average Demand score for the database since December 2023, and reflected a strong positive condition for the market. The trend remains to the upside.
However, there are a few indicators that raise some red flags, with the most important being the trends in Buying Power and Selling Pressure, measures of Demand and Supply. Buying Power has eased lower since October 1 and Selling Pressure has edged higher since September 19, with both ending their favorable trends that had been in place since August. But the “breaks” of these trends can also usher in a period of sideways movement, which would be consistent with a pause in a rising market. Still, the positive spread between the two currently remains wide, and therefore still supports the bullish argument for the intermediate term. For investors, the issue now is dealing with current market weakness, likely a result of pre-election uncertainty. Short-term indicators have been flashing warnings on and off for several weeks. However, for each negative short-term event, there seems to be an offsetting positive indicator. Seasonally, this time of year has been known for big surprises.
Key Points
The gold price hit another record high on Monday, at about $2,725 per ounce. The metal is up 32% in 2024. Tuesday was a busy day of 3rd quarter profit reports from big companies. Major indexes closed about flat. Rising bond yields (and declining bond prices) seemed to spook the stock market on Wednesday, with the 10-year Treasury yield hitting 4.24%. The dollar gained ground. The S&P 500 Index fell 1% last week, and the Dow Industrials dropped 2.7%, ending a six-week winning streak for both. The NASDAQ rose 0.2%, extending its win streak. Economically sensitive stocks took the worst hit.
So, it wasn’t much of a week for the stock market. The rise in bond yields is probably a reflection of the fact that the Fed will cut interest rates fewer times than investors had thought after September’s Fed meeting, a result of inflation being above its target. At the moment, investors are in a bind trying to process the possible outcomes of three looming events—Big Tech profit reports this coming week, the elections on Nov. 5, and the Fed’s monetary policy decision on Nov. 6.
Strange things have been afoot. Economic data have been so strong since Sept. that the Fed’s GDP model says the U.S. economy will grow 3.4% in the 3rd quarter. Talk of a runaway Trump victory despite polls suggesting a too-close-to-call race is also said to be affecting markets. The U.S. dollar has gained 3% in October. These factors can affect inflation, which puts the stock market in a state of uncertain limbo. Investors seem to be reluctant to act.
Barron’s fall BIG MONEY survey results are in. Half of the responding money managers expect stocks to keep climbing in the next 12 months, even as the market weathers bursts of volatility. They believe large caps will perform best over that period, with small- and mid-caps trailing behind. 32% of the managers say they are neutral, and 18% call themselves bears. The optimists expect the major indexes to rise about 7-8% through the end of 2025. The bears see the Dow falling 9%, the S&P losing 14%, and the NASDAQ dropping 20%. The biggest risks the stock market will face in the next six months are resurgent inflation and geopolitical turmoil. As to turmoil, the gold universe has been soaring and silver hit a 12-year high, both being pushed up by safe haven Demand, ongoing tensions in the Middle East, and buying by global central banks. Over time, if any country, especially including the U.S., continues to increase its debt load, the only solution is currency devaluation. In that situation, gold is king and maybe Bitcoin???
