The S&P 500 has been delivering a classic Santa rally into year-end. At the same time, however, analysts have also been turning more cautious on earnings:
- The breadth of revisions in next-12 months earnings (i.e., analysts upgrading relative to those downgrading) has seen a sharp deterioration since mid-October
- Analysts are beginning to factor in the negative impact from prior rate hikes in a move that’s more consistent with the signal from leading economic indicators
This is in-line with our expectation that the economy is weakening.
Stocks have still managed to post a 15% return since November. That’s because of valuation (P/E multiple) expansion.
The Fed has been envisioning rate cuts next year to minimize any potential downturn, pushing P/E multiples higher:
- In their mid-December meeting, the Fed estimated about 70 bp of cuts for 2024
- The market is being a bit more aggressive, anticipating 140 bp of cuts
Valuations are expanding as the market is focusing on these rate cuts but not yet pricing economic weakness:
- With stocks overextended today, it seems likely that they will at the very least take a breather
- Valuations could continue to rise in a euphoric move in the coming months
- If earnings don’t move higher, high valuations will eventually deflate. Earnings are ultimately the fundamental driver of returns, not P/Es
There were only few key developments since our last ratings post:
- Added Equally-Weighted Tech Stocks ETF (RSPT) to our ratings report with an initial score of 5 as valuable opportunity on a bet on the stock market rally broadening out
- We’ll be removing TUR from the report going forward as we’ve lost conviction in the trade following a deterioration in price momentum
As a reminder regarding our stop-losses, we mainly pay attention to weekly closes given our investment horizon of 6-12 months and to minimize whipsaws.
Ratings:
Assets:
Gold Miners (GDX ETF)
Rating = Buy (7)
- We’ve been increasing our conviction in GDX in the last few weeks. We’ve upgraded from an initial rating of 6 to a 7 on the back of a head-and-shoulders pattern that’s playing out. The indicated target on it is $34.
- The upgrades have worked well, as GDX has benefited from a broadening out of the market rally. As we’ve highlighted prior reports, GDX outperforms when gold rises and market breadth expands. It’s bested the S&P 500 and gold after the Fed’s dovish meeting in mid-December.
- One risk is that gold prices consolidate and become a drag for GDX. We’ve turned a bit more cautious on gold If GDX were to break below $29.37, we’d likely downgrade it to neutral.
Utilities Stocks (XLU ETF)
Rating = Buy (7)
- The Fed-driven surge from mid-December has reversed. Price broke down below the 200-DMA, the steep uptrend line and now sits slightly below our $63 stop-loss. If it closes below that level this week we’ll downgrade to a neutral stance.
- While an potential downgrade may reflect a loss in technical attractiveness in the near-term, we remain bullish on Utilities. The sector is becoming relatively more attractive, with the XLU/S&P 500 ratio nearly at support.
- Utilities are priced attractively, offering a 20% discount to the market, more than any other defensive sector. That makes them very attractive hedges if a recession materializes next year.
Chinese Stocks (MCHI)
Rating = Buy (6)
- Chinese stocks saw more weakness last week in what could have been a capitulation move. That’s taking them closer to the key support level of $39, a potential inflection point. As a result, after weeks at a neutral rating, we upgraded to a 6 in our last ratings report.
- MCHI is priced at very cheap valuations, with a lot of pessimism baked into it. It’s a highly contrarian bet that could see a sudden and rapid surge if strong fiscal stimulus measures are announced. Hence, we’re keen on keeping our cautiously optimistic bias for now.
- If, however, MCHI breaks below our stop-loss of $39, we’ll consider downgrading to a neutral stance again. Otherwise we run the risk of MCHI turning into a value play if it fails to regain momentum from this key level of support.
Uranium Miners (URA ETF)
Rating = Neutral (5)
- URA has been bounded between overhead channel resistance and uptrend support for months now. It’s a very volatile asset, and hence if it breaks through channel resistance, we’d likely upgrade to a 7 or an 8 as significant gains could materialize quickly.
- We’d been bullish on URA in recent months, but downgraded to neutral in late-November given its proximity to channel resistance, where it’s seen some very big rejections and stalled.
- URA is trading substantially above key moving averages. We remain tactically cautious as it’s possible that it moves down to the $25 level to meet them if it breaks uptrend support. We’d consider re-entering URA then given the more favorable risk-reward.
S&P 500 Index
Rating = Neutral (5)
- We’re changing our usual technical chart to the one shown below. It uses a different price channel that avoids the false breakdown of October.
- In our last ratings report we upgraded the S&P 500 to a neutral stance after it broke through key resistance, that we’d set up as our stop-loss for our of prior rating of 4.
- Price is inching towards the top of the price channel. The risk-reward for the S&P 500 looks poor here given it’s very close to overhead resistance, it’s overextended and the put/call ratio is very low as we mentioned in our last ratings report.
- That tells us that the S&P 500 is likely to take a breather here, at the very least. There are more opportunistic bets on a Fed pivot like Ethereum and RSPT, as we document in those sections.
Turkish Stocks (TUR ETF)
Rating = Neutral (5)
- TUR broke down uptrend support again last week following a false breakout driven by the Fed’s dovish meeting in mid-December. Momentum on the Turkish policy pivot trade we highlighted back in early-August has broken down after a good run.
- The market looks worried that the central bank raising rates to 40% recently will end up proving too painful, wrecking the economy and earnings.
- We’ve lost conviction on TUR and will be removing it from the ratings report going forward. But we’ll keep monitoring for any signs that show TUR is regaining momentum.
Equally-Weighted Tech Stocks (RSPT ETF)
Rating = Neutral (5)
- We’re adding an equally-weighted Tech stocks ETF (RSPT) to our ratings with an initial score of 5. If you haven’t already taken a look, please check out our most recent Investment Radar piece detailing our investment thesis.
- RSPT represents a more opportunistic bet on a broadening of the stock market rally than small-caps do. However, it’s trading close to resistance and therefore we should wait for a more favorable tactical entry.
- RSPT is a more reasonably-valued play on Tech stocks than other ETFs like XLK, that weigh large-cap Tech names more heavily in the index. Valuation is a factor that the market has systematically rewarded during Fed pivots.
Tech Stocks (XLK)
Rating = Sell (4)
- XLK is approaching the top of channel resistance, making the risk-reward unfavorable. Hence, we maintain our Sell rating at 4.
- Price is seeing some rejection close to the top of the channel, but it’s difficult to say whether this is an early reversal or whether XLK still has a bit more to go here.
- We’d favor an equally-weighted Tech index like RSPT rather than a cap-weighted one like XLK that puts more weight in large-cap expensive Tech We think it’s a good option for investors currently invested in XLK to rotate into to catch more upside.
- RSPT offers a more attractive way to get exposure to the same secular tailwinds that XLK has, in an environment where the stock market rally looks poised to broaden out. There’s significant runway for RSPT to outperform XLK here.
Energy Stocks (XLE ETF)
Rating = Sell (3)
- XLE managed to trade back above trendline support, driven by a weakening dollar following the Fed’s ultra-dovish meeting in mid-December. Concerns around supply disruption in Red Sea oil tanker transporting due to Houthis’ attacks probably played a role too in the move higher.
- As we mentioned in our recent Flash Update on XLE, we’d revert to a neutral stance if price closes above the $85.50 stop-loss. While it was hit on an intraday basis on Thursday, it’s not yet closed above it.
- We believe this is a great setup, so even if we ended up reverting to neutral, we’d keep monitoring for a potential re-entry to the short side as we remain bearish on the macro backdrop.
Treasury Bonds (TLT ETF)
Rating = Strong Buy (8)
- Momentum on TLT remains strong. It’s managed to clear its 200-DMA, something it’s struggled to do since 2022 save for very short-lived episodes.
- A steep trendline is offering support. A re-test and hold would provide for a favorable entry and likely lead us to upgrade our rating, as TLT remains one of our highest conviction bets.
- We’ll remain constructive on TLT as long as it trades above $92.
- As we highlighted in our last ratings report, the S&P 500/TLT ratio is reversing off key resistance. That could have some follow-through given how overextended stocks are today and the oversold starting point for bonds following the historical drawdown of 2022 and 2023.
- While Fed pivots tend to see stocks post better returns than average, bonds tend to outperform stocks.
Copper
Rating = Buy (7)
- Over the last several weeks we’ve been turning incrementally more constructive on copper, moving from a somewhat neutral stance to a bullish one at a rating of 7.
- The metal is being supported by a steep trendline, indicating strong momentum. If price were to break down from it, we’d likely downgrade to a 5. The right-most trendline offers additional support for a potential re-entry. The setup looks constructive to us if price stays above $3.67.
- Copper demand may increase due to a dovish Fed that’s easing global financial conditions (i.e., falling interest rates and weakening dollar). That could be another way that copper sees upside without necessarily relying on China deploying large fiscal stimulus.
Silver (SLV ETF)
Rating = Buy (7)
- We’ve been very bullish on SLV going into the Fed’s pivot as a levered bet on dollar weakening dollar. There’s a potential head-and-shoulders pattern that expresses that view from a technical standpoint. The pattern would activate if the economic data begins to deteriorate.
- We have a stop-loss at $20. We’d likely downgrade SLV to neutral and wait for a better entry if it gets triggered, while also invalidating the head-and-shoulders pattern.
- We’re more constructive on SLV than GLD given the developments in the Gold/Silver ratio that we highlighted in a recent report.
- The dollar has been a helpful intermarket signal in ‘23 for spotting overpricing in silver, that’s helped anticipate sharp pullbacks. The last one was in early-December. We don’t see any major vulnerabilities in silver when using this indicator today, increasing confidence in our rating.
Gold (GLD ETF)
Rating = Buy (6)
- In the last few weeks we’ve reduced our bullish conviction in gold relative to bonds, with our latest thoughts on the yellow metal highlighted in our recent Macro Newsletter. We’re favoring TLT over gold, mainly due to a significant reversal in the Gold/TLT ratio.
- We remain constructive on gold as price is re-testing resistance on the back of a recent golden cross (i.e., 50-DMA crossing over the 200-DMA). With both moving averages now much closer to the price than in prior re-tests (i.e., less overextended), a breakout looks more likely.
- From a fundamental standpoint, gold offers diversification benefits in economic regimes when inflation could turn volatile. We believe it merits a place in a portfolio as a diversifier, given that it’s a different type of hedge than bonds.
- Our stop-loss on GLD is set at $180, at which point we’d downgrade to a neutral stance.
Oil
Rating = Sell (4)
- Oil is seeing a small rebound off key support after breaking down below key moving averages. We warned about that possibility in our last ratings report. As we mentioned for XLE, supply worries are likely at play here, as well as the weakening dollar brought upon by a dovish Fed.
- However, we’re aware of a potential rebound from current level of support. We’d likely move to a neutral stance if it were to breakout of downtrend support, clearing the key moving averages.
- We remain bearish on oil as a bet on a weakening macroeconomic environment. Oil tends to follow a similar playbook around recessions: a big drawdown followed by a massive recovery.
- The potential head-and-shoulders pattern represents a technical expression of how that trade could work. Breakdowns in oil prices tend to be aggressive given its volatility.
Ethereum
Rating = Strong Buy (8)
- Ethereum is our high-conviction bet on a Fed pivot melt-up. The recently-triggered golden cross is a very bullish signal for the cryptocurrency.
- Moreover, unlike equities, Ethereum doesn’t look overextended. It’s trading close to the moving averages and price channel support.
- Our stop-less was set tightly, at $2,100 on a weekly close. If it gets triggered, we’d downgrade ETH to a neutral stance until a more favorable entry emerged.
- Bitcoin’s recent outperformance over Ethereum has pulled the ETH/BTC ratio to a key support level. That increases the odds that ETH’s will begin outperforming BTC imminently.
Bitcoin
Rating = Neutral (5)
- Bitcoin is trading near channel resistance, and so is its market dominance. Meanwhile, the ETH/BTC ratio is near key support. That all points to limited runway for Bitcoin relative to Ethereum and increased potential for altseason getting started very soon.
- 30-day expected volatility in BTC, as derived by options markets, has been rising into year-end. That means that the market is expecting higher near-term volatility in crypto. That seems idiosyncratic to that market, as equity volatility (i.e., VIX) has been falling over that timeframe.
- Rising Bitcoin expected volatility saw a similar development leading into 2021’s altseason, that began early that January.
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