The Bull is Still Young
From mid-October through early November 2023, we made a compelling argument that equities were on the cusp of a significant bullish rally. This optimism was grounded in a confluence of factors including technological advancements, sentiment indicators, cash allocations among professional investors, and a potential shift towards more accommodative monetary policies amid subsiding inflationary pressures. Market signals with a strong historical track record seemed to align, reinforcing this bullish outlook.
- We turned adamantly bullish in October 2023 for very specific reasons discussed here.
- Our favored view has played out even better than we anticipated.
- Now we look at indicators to gauge whether the bull has further to run.
One such signal, the McClellan Summation Index, underwent a notable shift from <-1000>1000 early in 2023, marking its first such movement in two years. Historically, this signal has preluded positive market performance in the following 3, 6, and 12 months, with an impeccable track record of predicting the onset of new bull markets post-bear phases, without any false positives.
In addition, as of mid-October 2023, investors were over-hedged and underexposed en masse in a historically significant manner, as evidenced by a reading of 1.2 in the 10-day moving average of the ratio of total put-buying to total call-buying on the CBOE options exchange.
1.2 in that measure is a very rare level. We have only seen it happen a handful of times over the past 10 years and each time signaled that we were at or near an important market low. The last three times it reached that level—all occurring in the past five years—were clear major buying opportunities.
The fourth time in that span occurred on October 6.
This unparalleled accuracy was further supported by a series of breadth thrust signals witnessed in early November following the November 1 FOMC meeting, including:
- TCTM Composite Thrust Model Signal
- 91% McClellan Oscillator Crossover Breadth Thrust
- NYSE Zweig Breadth Thrust
- Russell 2000 Zweig Breadth Thrust
- 3-day 50/200-day MA double breakout thrust
- VIX 7-day Drop buy signal
Such synchronicity in market signals has historically heralded significant market upturns.
Adding to the bullish narrative, data from the Bank of America Fund Manager Survey indicated a shift in sentiment among large fund managers toward no longer underweighting equities for the first time in over eighteen months. The last time we saw such a shift was 2009, which prefaced the lengthy bull market that ran all the way to March 2020 when the pandemic hit.
Investor positioning also suggested a ripe environment for a market rally. Over-hedging and a widespread underexposure to equities, as highlighted by the CBOE options exchange data from October 2023, presented a strong contrarian indicator.
This, coupled with a Cup-with-Handle breakout pattern in the S&P, set the stage for the market's upward trajectory.
The emergence of an 'Everything Bull Market'
The past six months have witnessed an extraordinary wave of global rate cuts, a scenario unfolding without the typical precursor of an economic downturn. In all, according to Bank of America, we have seen 55 global rate cuts over the past six months.
This unique monetary landscape has fostered what's been dubbed the everything bull market, seeing not only a surge in stocks but also similar surging action in commodities like cocoa, gasoline, copper, and oil, along with Bitcoin, gold, and silver.
Bonds, however, have lagged as the market grapples with the implications of the possibility that the US Federal Reserve is quietly increasing its inflation target, which would be a step that bears a cost on the policy credibility side.
AI: The Defining Theme
Among various themes influencing the market, artificial intelligence (AI) stands out for its profound and tangible impacts across industries. This isn't merely speculative fervor akin to the dot-com bubble; AI is fundamentally reshaping global operations.
The potential for brand-new entrants to disrupt established markets is immense, provided they secure necessary venture capital (VC) backing. Conversely, traditional market leaders making half-hearted attempts at AI integration risk falling behind in this dynamic landscape.
The race for AI supremacy, likely to dominate market narratives in the coming decade, currently sees giants like META, NVDA, MSFT, and GOOG leading. Yet, the VC arena, populated by firms such as Kleiner Perkins and Sequoia, is ripe with potential disruptors poised to challenge the status quo.
As we venture deeper into the AI-driven market landscape, the importance of 'compute' capability becomes ever more clear, placing semiconductor companies and tech innovators like NVDA at the forefront of this transformation.
With no definitive moat around AI technology, staying abreast of VC moves and emerging pre-IPO opportunities becomes crucial for investors aiming to capture value in this rapidly evolving space.
Looking Ahead
The technical backdrop is favorable for continued bullish action in equities. The trend channel is sturdy and bound into a grinding and steady slope. In other words, we aren't seeing parabolic behavior.
We also have strong thematic leadership, which is important in significant and extended bull markets throughout history,
Historical stock market booms in the 1920s and 1990s, both driven by this time is different narratives and groundbreaking technological advancements, serve as quintessential examples. The 1920s witnessed the mass adoption of electricity, automobiles, telephones, and radios, while the 1990s were defined by the IT revolution and the internet's emergence, revolutionizing communication, information sharing, and consumption.
Presently, we stand at the threshold of similarly monumental technological leaps in fusion energy, quantum computing, and artificial intelligence (AI). These innovations not only promise to transform their respective fields but also to mutually accelerate each other's development. AI is already making significant impacts, reshaping industries by enhancing research and development speed and fostering rapid progress across various sectors.
Mirroring the 1990s, we're observing potential parallels with the Federal Reserve's approach to managing economic growth and inflation. Like the mid-90s soft-landing scenario—where the Fed successfully raised rates without triggering a recession and then cut rates to sustain growth—current forecasts by major analyst firms anticipate a similar trajectory for the economy in 2024. This includes expectations for rate cuts by the Fed, starting potentially at the March meeting, amidst ongoing strong economic indicators.
Demographically, the 1990s boom benefited significantly from the Baby Boomers, then the largest generation in U.S. history, entering their peak earning, spending, and investing years. Fast forward to today, Millennials have surpassed Boomers as the largest generation. Many Millennials are already past 40, with the median age expected to hit 40 by 2027. This demographic shift suggests a potential repeat of the 90s scenario, where significant capital influx into mutual funds and similar investment vehicles by the largest generation spurred a bull market.
In terms of both breadth and sentiment, the bull trend appears sturdy as well. Over recent weeks, we have witnessed a clear broadening in leadership, with materials, energies, financials, industrials, and small caps all seeing increased accumulation.
The economic picture is strengthening as well, which is helping to drive leadership accumulation in cyclical sectors. Contrary to fears of a recession, the US economy is on track for another year of growth exceeding historical trends. After months of ambiguity, the US Regime Indicator has shifted back into a 'Recovery' phase.
Simultaneously, the Conference Board Leading Economic Index (LEI), which compiles ten high-frequency indicators predicting short-term economic activity, has shown month-over-month growth for the first time in two years. This positive change underscores a more optimistic outlook for the US economy's near future.
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