The best way to describe the tape action last week and since the October 2023 low is “the grind higher continues”. Fortunately, the grind higher has recently been taking on more participants, albeit hesitantly and with much consternation. Also, the number of New 52-Week Lows (a guidepost for when the odds of a meaningful decline increase—reach out for a chart) refuses to expand.

While various measures of short-term breadth continue to diverge, the equity market maxim “the trend is your friend” remains true. This is especially evident with the Large Cap “Index Movers.” As Don Hagan penned, “The Catastrophic Stop model is still positive, and we are aligned with the message.

From “Mag 7” to “Lag 7?” Not completely, yet. But the number of technology stocks exhibiting relative outperformance is slowly declining, especially when compared to alternative equity market proxies. Also, while still underperforming the S&P 500 YTD, other sectors—Energy, Health Care, Financial, Consumer Discretionary, and Industrial—are slowly moving up the relative strength scale.

For the most part, the “Index Movers” have held up and marched higher—still bullish. However, under the surface, while a sell signal has not occurred, “conditions” (broad upside participation), which don’t offer a precise timing aspect, are not as rosy and are actually downright poor/weakening.

During my four days in Montana for a wedding, I was struck not just by the state’s beauty but the similarities Montana shares with the condition of certain parts of the domestic equity market.

Large Cap Growth/Technology stocks that dramatically influence the price direction of certain capitalization-weighted domestic equity market indices are starting to outperform again. This is at the expense of the broader market and has produced some negative breadth divergences. Unless remedied, it is set up to produce either a time or a price correction.

In the spirit of Occam’s razor, which suggests finding an explanation using “the smallest possible set of elements,” we’ll focus simply on the recent price action of the Large Cap Growth/“Magnificent 7” heavy NASDAQ and S&P 500.

As we review 2023, let’s apply one of Marty Zweig’s mantras to 2024: “The market is smarter than I am, so I bend.” At Day Hagan, we bend by following objective models and indicators—overweighting statistical probability and underweighting emotion.

2023: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair….”

The broad market started participating/outperforming on November 13. While this is supportive of equities, it also helped produce extreme bullish sentiment readings. This condition will likely persist into year-end. We will watch to see how this condition resolves as 2024 starts and we get past the first few weeks of new-year flows.

Following this week’s macro events (CPI earlier today, PPI & FOMC policy and Q&A Wednesday, Retail Sales and global Central Bank policy Thursday) and year-end tax loss harvesting, equity market trading is likely to slow into the holidays and year-end. Let’s consider a possible 2024 scenario.

With several internal equity market measuring tools closing above some previous peaks (resistance points), last week’s tape action was more about stocks other than the “Magnificent 7” that has been the focus of Wall Street for much of 2023.

Resistance in the SPX may produce some profit-taking, but the quality of any pullback period that may occur will be an important guidepost in determining if a long-term topping process is developing. Considering favorable seasonals, the Bulls have the ball.

Apart from last Tuesday’s “Everything Rally,” during which advancing volume and advancing issues traded on the NYSE were 90% of total volume and total issues traded on the NYSE (bullish), the ensuing tape action displayed by the S&P 500 (SPX) resembled a sideways drift after encountering resistance and sentiment reached “excessive optimism” levels.

Interest rates, energy prices, and the U.S. Dollar moved lower last week following softer macro data, dovish remarks from Chairman Powell, and a less hawkish Bank of Japan policy tweak. When combined with outsized CTA short positioning, a squeeze occurred. This produced an impressive topside move by all domestic equity market proxies. This now begs the question, “What’s next?”

What you see is largely a function of where you sit. And when it comes to 2023, you are either espousing “peace on earth, good will to all” or you are thinking about how 2023 has offered up many “tricks” with only a few, very select “treats.”

Considering the plethora of forces moving markets (CTA positioning, bristling geopolitics, mutual fund year-end and individuals’ tax-loss selling, dysfunctional domestic politics, QT, sentiment extremes, EPS expectations, slowing/accelerating economy or both, etc.), it’s concerning that Wall Street continues to espouse specific levels of importance for equities and interest rates. Rarely are things on Wall Street as simple as they seem.

The stocks holding up the major domestic equity market indexes (Magnificent 7, Elite 8, Big 9) have yet to break down below their late September-early October lows. But away from this complex, plenty of selling has been occurring underneath the surface. I recommend following the NYSE Fang Plus Index as a guidepost.

My wife calls me the “Question Man” because I am usually peppering her with questions about “things and stuff” which are probably insignificant to her. To me, not so much.

“October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."