Investment Insights

 — Steve Orr 

Catch

Hard to believe, but by the end of this week, we will be halfway through December. Just 11 trading and seven shopping days remain on the calendar. Remember, I wear a size large. December ranks third in monthly performance for the U.S. indices. It averages a fine 1.5% return over the past 70 years according to our dusty Stock Trader’s Almanac. The election rally carried some steam into the new month but is catching its breath (breadth too). 

The S&P 500 gives a good example. Look at the chart below covering the past several months. 

Source: Bloomberg, L.P.

What are we looking at here? Green bars are up days; red, the market went down. The big index has been in an impressive uptrend since bottoming in July. The purple line is the 50-day moving average. The yellow, almost straight, line at the bottom is the 200-day moving average. Think of the 50-day as the most recent two or three months. The 200-day is closer to a trailing year of activity.

The percentage distance between last Friday’s closing price down to the 200-day is just over 8%. In other words, the index could have an 8% correction down to the moving average and still be in an uptrend. An 8% gap is fairly large, more than a standard deviation above the 200-day average. That leads us to say the S&P 500 is overbought at the moment. Markets can stay overbought or oversold longer than you can remain solvent, but in general these conditions suggest a market ripe for a pause or correction. The percentage of stocks above their 50-day moving average has dropped in the past couple of weeks from 81% to 54%. So, half of the S&P is moving higher versus a couple of months ago. Declining stocks have outnumbered rising stocks over the past couple of weeks, suggesting a tired rally.

That arrow points to a chart window created by post-election euphoria. Note how the glee wore off and prices fell back down to the window level, shedding its gains by 11/19. That is a classic chart “throwback.” (Note, pullbacks are the opposite). Once the noise settled down about the new administration spending even more than the current one, the rally gathered steam until the past couple of days.

The Magnificent 7 have led this leg, but the rest of the index has taken a time out. When just a few generals march to battle with no privates behind, it suggests a topping process and consolidation has begun.

Constructive

Consolidations can be a fat zero or constructive. They can develop into a Bear cycle if financial and econ conditions are deteriorating. We do not see those conditions developing. Big picture: Employment continues to grow in certain areas; unemployment is near its low; inflation is higher than we would like but steady at 2.7%; and stocks, gold and crypto are either at or near all-time highs.

The economy has endured a rolling recession since the Fed started raising rates in 2022. Housing took the first hit as mortgage rates climbed. Industrial production was next, dealing with the supply aftershocks from shutdowns. Then no one needed big pharma vaccines, and so on. Since most our economy is based on services, we do not have the big swings of industrial production driven cycles as we did post-World War II.

We will stick with the idea that this consolidation is a typical pre-Santa rally pause. Interest rates have edged up slightly, reflecting the fact that the Fed’s inflation fight is not yet done. We think the Fed does go ahead and cut rates next week by one-quarter of a percent. Whether they need to, given the scorecard in the above paragraphs, is another question. You buy the first round; I’ll pontificate.