Day Hagan Tech Talk: The News
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Summary
Alongside the U.S. Presidential and Congressional election outcome, how equities react to today's Fed announcement may be significant in the short term. Considering yesterday’s moonshot, please incorporate a strategy emphasizing risk management.
More to the Point
I found some of Don Hagan’s pre-Tuesday insights timely (paraphrased):
Equity markets are now entering a seasonally favorable time of year. Looking at the Dow Jones Industrial Average’s performance during different Presidential and Congressional combinations since 1901, a Republican President and Split Congress have historically had the lowest returns since 1901. However, that condition has only been in place 11.4% of the time, which is a relatively small sample size. A Republican President with a Republican Congress has historically been better for equities (7.3% annualized return, 22.7% of the time). Nonetheless, we take these kinds of studies with a grain of salt.
Ned Davis Research (NDR) states, “Year-end rallies have tended to be stronger in election years, with the second half of November and the second half of December the two strongest two-week stretches, based on median returns.”
Policy initiatives (tax policy) will most influence the financial markets. “History shows that a ‘High Tax’ environment does not support high valuation multiples.” (Source: Valens.) Let’s see how this plays out based on the final makeup of Congress.
Regarding tariffs and protectionism, it’s hard to say the end results, given that the President has the authority to issue executive orders on tariffs and immigration. Nonetheless, using campaign rhetoric to make investment decisions has proven to be folly over the many election cycles in which we’ve participated.
Our Smart Sector strategies aim to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the Catastrophic Stop model is positive, and we are aligned with the message.
Simply stated, we manage risk by responding to changes in our models, not someone’s opinion. Currently, our model views the uptrend as intact. If our models shift to bearish levels, we will raise cash.
Bull Markets are More Fun than Bear Markets
As we’ve seen in 2024, “Bull markets are more fun than Bear markets” (Bob Farrell). While my reasoning may not have been totally accurate, my opinion that Small Caps would make a run at their 2021 price peaks has been consistent.
Figure 1: Mid-Cap, Small-Cap, and DJ Transportation – weekly data. | Big base breakouts are more telling (bullish) than not.
Figure 2: S&P 500. | Important tactical support 5700 to 5670+/-; more structural support 5400.
Note: My price objective of 5900 for the S&P 500, highlighted on 9/20/24, has been achieved. Based on a previous base breakout, the next objective is 6100, also highlighted on 9/20/24.
Stepping Back
The Fed cut interest rates by 50 basis points on September 18, believing the economy needed some stimulation. Since then, however, bond yields have steadily marched higher. What isn’t obvious in Figure 3, which depicts the 10-year U.S. Treasury Yield (4.43%), is that resistance exists around 4.50% (minor), followed by 4.64% and 4.75% (important). If resistance is violated, a test of the 5.00% level, last year's peak in October, shouldn’t be surprising. Regarding Figures 3 and 4, regardless of the Fed's decision today, let's step back and consider the longer-term perspective. Resistance is highlighted in red and support is in green.
Figure 3: 10-Year U.S. Treasury PRICE and YIELD. | Some say a chart is worth a thousand words.
Figure 4: 30-Year U.S. Treasury PRICE and YIELD. | Some say a chart is worth a thousand words.
Final thoughts: “While rising interest rates create greater concern about valuations, interest rates have not hit critical levels, based on level and speed, that have derailed stock market rallies. However, a big question for 2025 is ‘Can the stock market overcome its valuation problems through earnings growth?’” (NDR.)
Please let me know if you would like to schedule a call to discuss the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies. Disclosures and Fact Sheets can be found here: https://dhfunds.com/literature
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 11.05-06.2024. Chart source: Stockcharts.com unless otherwise noted.
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Disclosure
The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM, or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
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