Are We Seeing Green Shoots in the Market?

The 10-year Treasury yield hits resistance … oil prices are dropping … is the U.S. dollar topping out? … what the S&P’s technicals suggest about a rally … a critical event with Luke Lango tomorrow

Three headwinds have been weighing on stocks for months. Here in the Digest, we’ve named them the “Toxic Trifecta.” Let’s start by checking in on the current condition of this Trifecta.

We’ll then look at today’s market through a technical lens to get a sense of when we might see some sustained relief from this prolonged stretch of market weakness.

First, and perhaps most important, is the easing of 10-year Treasury yield

The 10-year Treasury yield is the single most important number for the global economy and investment markets.

The higher this yield climbs (as it’s been doing for months), the more pressure it puts on stocks for two reasons.

One, a higher yield means a higher discount rate, which lowers stocks’ current valuations; two, a higher 10-year Treasury yield entices some investors to pull their money out of stocks to benefit from this “risk free” higher yield (it’s risk free when a government bond is held to maturity), and that puts downward pressure on stock prices.

As you can see below, the 10-year Treasury topped 5% last week, yet has since reversed and is now lower. As I write Tuesday, it sits at 4.86%.

Source: StockCharts.com

Better still, if our hypergrowth expert, Luke Lango is correct, 5% will be as far as the yield climbs.

Let’s jump to Luke’s Daily Notes in Innovation Investor:

To us, it feels like 5% was the psychological top for yields.

Fed talk has turned increasingly dovish in recent weeks, too, and there are two fairly major wars going in the world right now, so the backdrop just isn’t there for higher rates and yields.

[Last week], we saw the 10-year Treasury yield plummet. We think more easing is on the way…

It’s not just the 10-year Treasury yield either. Luke points toward the 7-year Treasury as well. Back to his Daily Notes:

[Last week’s] 7-year Treasury yield auction saw its biggest demand since March 2020 – during the depths of the COVID crisis.

Suddenly, everyone wants to get long bonds. This provides further evidence that Treasury yields have peaked in this cycle. 

This yield pullback is big news for stocks. If the bond market can keep the 10-year under 5%, we will see more green shoots sprouting in the stock market over the coming months as optimism builds.

Moving on to the next member of the Toxic Trifecta, we’re seeing significant improvements on oil prices

When oil prices climb, it hurts everything…

Consumers pay more at the pump, of course, which can be psychologically demoralizing. Plus, home heating/cooling bills rise.

Meanwhile, businesses also suffer increased input costs – and it’s not just the obvious businesses like airlines that have direct exposure to higher energy costs. Oil/gas is used in countless sectors as an ingredient in all sorts of consumer goods (to name a few, cameras, coffee makers, golf balls, lipstick, sunglasses…it’s an enormous list).

After hitting roughly $94 at the end of September, the price of West Texas Intermediate Crude (WTIC) has fallen under $83 as I write Tuesday morning.

Source: StockCharts.com

While still elevated compared with prices earlier this summer, the psychological difference between low-$80s and mid-$90s is enormous.

If prices can remain in the low/mid-$80s, it also will be supportive of market optimism as companies enjoy this tailwind going forward.

Finally, are we seeing the U.S. dollar topping out?

A strong dollar is a problem for multinational companies because it results in major currency headwinds from international sales. So, with about 40% of the S&P’s revenues coming from outside of the U.S., a strong dollar has been tough for corporate bottom lines.

As you can see below, since mid-July, the dollar has been steadily marching higher…until October. Over the past several weeks, it’s been saw-toothing, unable to push beyond roughly $107.

Source: StockCharts.com

Now, there’s no guarantee the dollar won’t muster renewed strength and push through this resistance point. But for now, this is bullish. If the dollar is in the process of topping out, and we’re about to see it begin to drift lower, it will be a psychological tailwind today and an earnings tailwind tomorrow.

So, looking at all three of our Toxic Trifecta, there are very real reasons for optimism.

Turning to the market itself, there are technical reasons to expect bullishness

In recent Digests, we’ve put various trading tools on your radar, one of which is the Relative Strength Index (RSI).

As a refresh, the RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as buying pressure wanes) while a reading below 30 means it’s “oversold” (and poised to climb as bargain-hunters step in to buy).

Well, the selling pressure in the S&P since the summer recently dragged the S&P’s RSI to its deepest level since last fall, which directly preceded the S&P’s bear-market low in October.

Think of oversold markets like a rubber band. The greater you stretch it, the farther/faster the ensuing snap-back when the tension eventually releases.

As you can see in the chart below, the RSI is now angling north, coming out of oversold conditions. This suggests the market is trying to dig in its heels on the recent selling pressure, trying to carve out support for a bullish reversal.

Source: StockCharts.com

There’s also reason for encouragement if we look at the MACD indicator

The MACD is another trading tool we’ve referenced frequently in recent weeks.

This “moving average convergence/divergence” indicator reflects changes in a price trend’s strength, direction, momentum, and duration. Traders use this tool by analyzing the location of the MACD line relative to its signal line.

Simplistically, if the MACD crosses above the signal line, it’s considered a bullish crossover, and potentially a buy signal. The opposite is true as well.

The S&P isn’t showing us a bullish crossover yet, but as you’ll see below, the MACD line is now flattening out. It appears to be closing the divergence with its signal line. This is the first step toward a bullish crossover.

We’re looking at the S&P with its MACD chart over the last month so you can see the change in the MACD inflection (in black, moving closer to the red signal line).

Source: StockCharts.com

Finally, seasonality should provide a tailwind behind a bullish reversion trade today

Let’s jump to the research shop Bespoke for these details:

November has historically been one of the best months of the year for the Dow Jones Industrial Average.

Over the last 100, 50, and 20 years, the Dow has averaged a gain of more than 1% in November, and the same can be said for the month of December as well.

Specifically, over the past 20 years, November has averaged a 1.99% gain and December has averaged a 1.00% gain.

Here’s a chart from Raymond James showing the “typical year-end rally.”

Source: Raymond James

So, putting everything together, there are reasons to believe the broad market is setting up for some sort of mean-reversion rally.

That said, regular Digest readers know that our discussion of the “broad market” is of limited value. As we frequently point out, the market is not one big monolith that rises and falls in unison. It’s made up of thousands of different stocks with wildly different fortunes and fates.

So, while analyzing the S&P is a helpful point of orientation, it’s critical that we dig deeper.

On that note, there’s one sector today to be especially careful about today as you look for trades

Tech.

Jumping back to research from Bespoke, the ratio between the price of the Nasdaq and the small-cap Russell 2000 has now climbed above its post-COVID peak of 7.57.

It’s at the highest level since September of 2000, directly before the Dot Com bubble meltdown. Here’s how this looks.

Source: Bespoke

But let’s be clear about what this means…

Many mega-cap tech/AI stocks have seen an enormous run-up in prices this year – these are the stocks trading at this nosebleed valuation, pushing the Nasdaq higher relative to the Russell.

But smaller tech/AI plays that haven’t been on the receiving end of the same tsunami of investment capital are offering far more attractive entry points today.

This is just one manifestation of the growing divergence in the tech/AI sector today. We’re about to see new leadership in AI stocks, and it’s critical that investors recognize the change that’s coming.

On this note, put tomorrow night at 8 PM Eastern on your calendar

On Wednesday, our tech expert, Luke Lango is holding a special live event to discuss this next phase of AI/tech investing.

To our point about a leadership change, Luke just recommended his subscribers sell their position in AI leader, Nvidia (locking in more than 1,000% gains, by the way).

Here’s part of what Luke said about this decision:

We’re looking to take those profits and roll them into the next batch of top AI stocks to buy. 

You see – all the money that was being spent on Nvidia chips won’t go away in 2024. It will just be spent on different, more customizable AI chip makers. 

That means that next year, Nvidia’s pain will be someone else’s gain. 

This is the AI Turning Point – the critical shift that will define what stocks win and lose next year. 

So… which stocks should you be buying right now? And which should you be selling?

Those are the billion-dollar questions we need to answer now if we want to make big money from top AI stocks in 2024.

This is exactly what Luke will address tomorrow at 8 PM Eastern. To reserve your seat for this free event, click here.

Stepping back, we’re seeing gathering evidence that the market is setting up for a mean-reversion rally. Let’s be ready to trade it higher.

Have a good evening,

Jeff Remsburg

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