Last week was home to two major market events, both slated within the US – general elections and the latest FOMC meeting. As quickly turned out, Trump would win this historical race, while Fed chairman Powell announced a 25bp cut in the Fed Funds rate, a more modest reduction than last meeting’s 50bp cut. Bitcoin and the major alt-coins have rallied into or near all-time Highs – but how have US stock markets reacted to lower rates i.e. higher liquidity (real rates currently near 1.4%, within historic ranges, approx. at the 38th percentile in the historic spectrum of the cost of money) and a president that promises to reduce tax burden and public spending but also threatens to introduce tariffs which will depress local wealth growth?
The bedrock of the economy, the small businesses and the consumer (who typically work in a small business), have been “hand wringing” as latest surveys such as the NFIB SBET tell us. The downstream results of a period of record inflation (though the rate itself has receded recently) are appreciable everywhere, consumers are thrifty, and businesses bearish – cutting down capital outlays and inventory. Manufacturing is in a substantial slump, Services are keeping GDP growth afloat (a large part of which is public spending) while employers were making contingency plans for either candidate taking over in January. Since Trump will be the one, the general expectation is that small business conditions will improve. But let’s look at some charts what the market is expecting.
The SP500, America’s popular large-cap average, has jumped over 4% in a week. More impactfully, small- & microcaps have made significant gains, with the Russell 2000 galloping roughly 8% and the iShares microcap ETF IWC >9%. This could speak for a broadening of the rally … however, how are the internals looking?
As you may inspect below, we’ve seen an expansion of stocks entering 52-week new High prices.
This is an effect that was visible across both exchanges of NYSE (typically ‘old-world’ industrials, materials, energy, financials and cyclicals) and NASDAQ (predominantly small-/microcaps, growth issues).
Indices and new Highs can only tell us so much about the market due to their selective construction and limited conditionality. Let’s look at how stocks have moved up or down as a group:
Advance/Decline summary lines show us that so far the move has been again limited to NYSE-type issues, with NASDAQ stocks as a group continuing to lag since 2021. Though the NASDAQ A/D line may have bottomed out in late 2023, the divergence is breath-taking. While only a single facet of the diamond, it is a weighty one, as so far it is signaling that the short-term future will more or less look like the recent past has looked, without drastic change.
This can be good, bad, or irrelevant, depending on your strategy. If you’re traversing stale leaders such as AAPL, NVDA, MSFT, AXON, AVGO, ORCL or ANET with a long-term holding strategy, this may entice you. When trading virile growth stocks, it is not the best news in the world, as recent lingering weakness in some leading issues such as AMBA or ZETA confirms. I’ve seen a couple of new candidates of stronger stocks appearing on my screens, but the environment is far from comparable with the strength that Chinese equities are showing right now. Thin and highly-concentrated leadership signals weak markets – which doesn’t mean that they can’t rally on, but which typically means that profits are to be made as a result of committed effort rather than letting animal spirits roam, such as in 2020-2021.
Despite big promises, thunder and fanfare, it is yet too early to tell whether the rally will hold, as we’ve barely seen a week pass since these new macro developments. Of course, there is a case for both bull & bear camps – markets may rally, or may roll over. In reality though, if you manage risk properly and perhaps trade both sides of the market (long/short strategies), this shouldn’t concern you much. But the fact remains that for now the trend continues upwards, and is potentially broadening out.
Though there is money to be made currently in China, Australia, Canada and Singapore as well as leading big-cap crypto tokens, I prefer fat liquidity as it is often found only in the US stock market and will continue to scour for new leaders – and you should do the same. While promising so far, we just haven’t yet seen the wave of new leading issues that would make this market great. We should aim to participate in the trend, but it should be done carefully and with one foot out the door. Don’t get overconfident, don’t become too bearish. Go with the flow. It all depends what will happen in the next 1-2months or so.
