Market ‘Defying Gravity’ is the prevailing view, which is absolutely a limited perspective of action. You aren’t yet at ‘normalization’ of the various ratios that historically characterize coming-out of a quagmire (that most stocks endured).
So of course, the S&P (viewed without thought) appears overbought (and is in a sense), but when viewed based on the market capitalization key to the S&P, it has indeed overpriced the mega-cap leaders, while confounded by the rest.
Really, small-caps want to attain a ‘rapid heart rate’ of appreciation, but we’re not really there yet with the tail-end of tax-selling headwinds, while much of it is behind. There are headwinds in terms of liquidity available to sketchy firms, and of course there are tailwinds for some of the same stocks post-tax-selling, but especially ‘if’ those companies (or a few) can actually promise delivering a result that in many cases has frustrated investors for quite a period of time.I’m not going to delve into sectors much, but a catch-up to underestimated Oil demand could help both Oil and Energy stocks, but that’s also inflationary so might coincide with the logical pullback in major stocks early in the year after a push of gains into that tax year. But again temporarily within context of what is now a Fed that’s heading towards rate cuts, not hikes even if ‘daily’ patterns of Treasuries has bumps-up particularly if ‘events’ press Oil rapidly higher (the normal supply/demand wouldn’t be rapid, whereas colossal war would be).
Market X-Ray: Need not reiterate what we’ve already and rightly assessed, a continuation pattern that features the big-cap leadership but is assisted by the significant broadening-out (better breadth) that sort of lifts all boats just a bit.In a sense S&P stopped ‘submarining’ per October washout call, and leaped out of the waters as if a missile launched from a sub, trying to achieve what is called ‘escape velocity’. But while the missiles are flying, the subs itself is less deeply submerged, but not yet performing like a ‘surface battle group’.This is probably not a good analogy, but you get the point: investors are eager for an upside romp, so money managers hopped aboard the already runaway train, so to speak, while the serious gains in stocks not already advanced lag, and likely such same managers are hoping to lighten-up on overpriced megas and focus on the probable-survivors still underwater, as we get into 2024. This might even be why they’re eager to talk the market down (as they’d done for a few months, amid mixed economic and technical outlooks).
The tide is still out for most of those boats, and a run-of-the-mine selection of smaller-cap stocks suggests that those actually delivering the promised goods in 2024 (plus favorable 2025 guidance) have significant rebound potential. It’s the case for a lot of companies, hence the better breadth without appreciation of significance when viewed individually.I can help it’s a bit complex, but this is the market we’re dealing with. Just for the basics you have the S&P itself in an ‘ascending wedge’ pattern that can’t be sustained indefinitely and always resolves with a shakeout, but given how suppressed the overall market has been, it isn’t a set-up for huge break.I disagree with analysts convinced that an Earnings Recession is ahead for a miserable 2024. Actually I see improvement amid tighter credit spreads, that if it comes down to it, isn’t problematic for the companies with solid conditions. I think the sentiment looks back at ‘ascending wedge’ patterns leading heavily to recession, and sure, that’s feasible, except the economy might remain just a good bit resilient, and incidentally it’s an Election Year, political agenda stuff be dammed. I realize (extreme) ‘politics’ could have an effect, otherwise not.Oil prices firm but not soaring, and the initiation of the Fed’s rate-cut cycle (perhaps in the Spring) which Treasuries are already anticipating. It doesn’t encourage me for Retail or even Autos yet, because there’s a lag and once people see rates coming down, there is some tendency to ‘wait’ with purchases, believing the trend will take rates lower still (and they will if that happens). But that’s a prescription for correction within an overall bullish context, for the markets broadly, and for the U.S. economy.
Bottom-line: Guess what? Inflation is not under control but directionally it is. In my view the US economy has not yet adjusted to how people are spending their money, as ‘most’ people have jobs and cash, but are unenthusiastic … probably why most economists and analysts got this past year wrong (missed a bottoming that was painful and in smaller stocks is still an ongoing process).Inflation will remain somewhat elevated, which is why the Fed itself is beset a good bit with doubts about how to handle things.More By This Author:Market Briefing For Tuesday, December 19Market Briefing For December 18, 2023Market Briefing For Wednesday, December 13
Market Briefing For Wednesday, December 20
