Market Journal: SPX 6000 Cometh. Soon
Post-breadth thrust consolidations are perfectly normal. BTFD with both hands.
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Discussion
This week was busy, so I’ve been piecing together my regular cross-asset market analysis in between meetings, kids, and workouts. And what’s funny is that analysis conducted while “distracted” tends to be better analysis, as you tend to tune out the noise and home in on what’s important. In doing that this week, one major thing has stood out: BREADTH.
In my process breadth reigns supreme unless the Fed is in the way (like it was in 2022). But when breadth AND the Fed line up? Oh boy.
The combination of the Fed’s pivot toward defending the labor market and Trump 47 underpinned a huge surge in breadth over the last two weeks that points to dramatically higher equity prices in the back half of this year. The great Jeff deGraaf - who has a breadth thrust signal named after him (!!) - discussed in his weekly podcast this week that the recent move in small caps has historically led to a 10% rally in the S&P 500 over the next three months. For those keeping track at home, 10% up from the recent high implies SPY $622 by mid-October.
Post-Thrust Consolidation: BTFD
Following sharp surges in market breadth it is perfectly normal for the market to consolidate, but just eyeballing the history of the powerful 30-day high thrust signal, the post-signal consolidations are to be bought with both hands.
The current consolidation has SPY trading just below its 20dma, and given the time-honored principle that “markets don’t bottom on a Friday” it would not be a surprise to see a capitulative spike lower Monday that sets the final low for the year. Hopefully that spike goes all the way to the 50dma circa SPY $540, but we’ll see.
(Vertical green lines in the charts below represent the date of the 30-day thrust signal.)
The post-COVID April 2020 consolidation is instructive. SPY sold off to the 20dma, rallied back to the highs, and then went back down and undercut the low to make a final low that has never been seen since. A spike lower Monday, a rally back to the highs, then a final retest in August would not surprise me. Either way, this dip is to be bought in SIZE.
1. Through the lens of relative strength, Tech/Semis vs. everything else became historically stretched in June. All that was needed was a spark. My thesis was that with the Citi Economic Surprise Index on the lows there was ample room for upside surprises in the economy over the balance of the year to drive a rotation into Everything but Tech.
2. Not only is a 5-10% fiscal deficit pumping continual stimulus into the economy, limiting potential downside, the critical Discretionary vs. Staples relationship began to turn up as it has ahead of a turn in the Citi Surprise Index referenced above. So, fiscal stimulus + “the guts of the stock market” told me to look up not down for the US economy, and to position in bombed out non-Tech/Defensive sectors.
3. The spark ended up being the launching of a rate cutting cycle in response to June CPI reported on July 11. We now have a dovish FED + a US economy already in a position to reaccelerate. Double whammy for a reacceleration.
4. Then comes July 20, which locked in Trump 47. The Trump 47 trade was already in the works post-debate, but July 20 cemented it.
5. Fiscal stimulus + Trump 47 + dovish FED = full blast economic reacceleration. Obviously the Fed is going to whip its rhetoric around, and Trump 47 odds will vacillate, but…
6. …The breadth thrust signals that have fired lately are early cycle indicators. They tell us emphatically to look up not down for the economy, markets, and cyclical sectors. So, it’s critical to not get whipped around the durable trends that are firming up here.
7. At the bottom of every cycle, the initial short covering rally is dismissed as “just short covering and not supported by fundamentals”. One of the best examples of this is February 2016 after the Shanghai Accord. Cyclicals RIPPED on massive short covering, and it was absolutely 100% early cycle behavior…but it took the market weeks/months to get on board with the economic upturn in the works. Same today.
In your mind, what is the fundamental rationale for a sustainable rotation into laggards at this point? Do you see the Fed easing cycle commencing in September as actually helping to put a floor in negative earnings revisions and lead to a positive earnings cycle? And that the Fed is stimulating into an economy that is already getting better?
I'm just struggling with this being more than just a positioning unwind trade, which can keep going for sure, but won't last