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.

Entering December, the fixed income allocation strategy shifted to risk-on leadership. The model is relatively overweight: U.S. High-Yield, Long-Term Treasurys, Short-Term TIPS, U.S. Investment Grade Corporates, International Investment Grade, and Emerging Market Bonds. The model is relatively underweight in U.S. Mortgage-Backed Securities and U.S. Investment-Grade Corporations.

Given the conflicting messaging of the Catastrophic Stop model increasing while the Daily Trading Sentiment Composite reflects near-term caution, we executed the November 20 signal by shifting 25% of the cash holding into equities. We are looking to redeploy the remaining 25% cash holding as sentiment eases or longer-term breadth thrust measures confirm the near-term signals.

The sector model moved to a more cyclical bias during the month. Entering December, the sector model is overweight: Materials, Communication Services, Energy, and Consumer Discretionary. The model is neutral on Consumer Staples, Information Technology, Real Estate, and Utilities.

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.

The DH Smart Value Portfolio continues to invest in companies producing excess returns through positive economic profitability, supported by solid balance sheets (quality), significant cash generation (profitability), and trading with considerable margins of safety (valuation). Using our consistent and differentiated investment approach, the DH Smart Value Portfolio is focused on outperformance, seeking higher total returns with lower volatility.

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.

This presentation reviews the financial markets throughout 2023, trends, domestic equity markets, banks, International & Emerging markets, U.S. Dollar, and much more. Financial advisors are encouraged to watch this presentation replay for a comprehensive understanding of the market trends and indicators.

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?”

The Catastrophic Stop model declined from last month and it now recommends raising cash. Entering November, the non-U.S. equity Core model overweighted Australia, Japan, and France, while underweighting the U.K., China, and Canada. The Explore model favored Brazil, India, Israel, Turkey, and Taiwan.

Entering November, the fixed income allocation strategy continued to favor mixed leadership. The model is overweight U.S. Long-Term Treasurys, International Investment Grade, and U.S. Treasury Inflation-Protected Securities. The model is underweight U.S. Floating Rate Notes, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities.

Entering November, the sector model remained with a mix of cyclical and defensive leadership. The sector model is overweight Communication Services, Utilities, Materials, and Industrials. Information Technology dropped to market weight, while Energy and Real Estate improved to market weight. Health Care and Financials joined Consumer Discretionary and Consumer Staples at underweight.

The DH Smart Value Portfolio continues to invest in companies producing excess returns through positive economic profitability, supported by solid balance sheets (quality), significant cash generation (profitability), and trading with considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.

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.