This weeks material covers:
Trend and risk monitoring
Market behavior after rate policy regime changes
Market perspective
Performance: Diversified portfolio vs Max Sharpe portfolio
Key takeaway: market outcome is more varied during a rate cutting cycle
Closer look at election year seasonality and weekly performance
Individual charts for the S&P, gold, BTC, NVDA, AVGO, COST, MCD, TSN
Macroeconomic Updates
Two weeks ago the Fed held its presser from Jackson Hole and confirmed that we’ll start to see rate cuts. In March I mentioned that it seemed like we had just seen the first joke in a FOMC press conference in a very long time. There were three or four jokes in the Jackson Hole read out. A stark contrast from 2022 when Powell stoically jawboned markets into a 3 month drawdown.
The economic calendar at Forex Factory is my favorite. Very simple view of the key information, with quick access to charts, and links to sources. Key measures largely came in in-line with forecast. Most notably, PCE is the Feds preferred measure of inflation.
PMI, housing starts, building permits, and employment figures are of interest next week.
I personally enjoy economics, but in the context of investing and trading all I care about is whether the economic conditions support continued optimism and uptrend. Employment has given us some warnings, but I am operating with the opinion that economic conditions continues to align to favorable market outlook.
Market Outlook
Trend
We remain in a strong primary uptrend. There are some headwinds that we’ll cover, but we can’t lose sight of the strength of this uptrend. My goal is to participate in uptrends until I see a confirmed reversal.
Daily
Weekly
Monthly
Trends are currently strongest across the board in gold, with equities as a close second. Bond prices have really cooled off, with the long term trend remaining strong. Commodities are showing the first sign of life in a while.
The 9 period up-down oscillator is neutral while the composite breadth score is at its maximum level.
Risk Monitoring
We’ve seen excellent progress toward recovering from the recent 5% drawdown alerts. I consider retaking the 21-VWMA and an upward sloping 5-SMA and 21-VWMA as strongest signs that we are clearing an alert.
The Dow cleared its alert when it went on to make a new high. The S&P has recovered its upward 5-SMA and 21-VWMA. The Nasdaq continues to show weakness.
The Fear and Greed Index is coming off of a high. This aligns to having seen a local low.
Sector Rotation
Finviv is a great resource to quickly see sector rotation. Industrials and utilities moving up together while tech and consumer staples move down together is an interestingly mixed message. Combined with financials holding strength for the past 3 months, this suggests that participants are shifting to optimism about steady growth coming from other areas.
VIX
VIX Keltner channel has rolled over, extending its 100% track record of confirming the local low in the S&P. Not returning to the regression channel is unfavorable.
The VIX contango slope indicator and its moving average difference have returned to a bullish state for the S&P.
VIX seasonality caught my interest.
August, September, and October are stronger seasonal months for the VIX, which is expected since these are the more challenging seasonal months for the S&P.
I just finished two new versions of the seasonality chart. The first looks at things by year of the presidential cycle, and the second looks at seasonality by week of year.
October of an election year is the highest performing month for the VIX, finishing higher 88% of the time, with an average increase of 22%. If trends begin to align to seasonality, there could be a great brief play to long VIX into October and follow it up with a short.
Chris Robb is a great account to follow for strategies on VIX options.
Week 39 of the year (beginning of October) has historically ended higher the greatest percentage of the time of any week of the year, averaging 2% higher.
Liquidity
There have been 3 notable central bank quantitative easing events. The low in central bank liquidity has been telegraphed 144 weeks from the conclusion of the first easing action. Liquidity levels are above the June 2024 low for the year, but in a wave structure that suggests a move lower.
The impact of central bank liquidity on inflation and risk assets isn’t straight forward, and some effects lead versus lag on charts depending on whether liquidity changes are announced ahead of time. If liquidity changes will influence investor sentiment we can expect to see that change appear in the most speculative assets first.
This chart compares BTC price and the market cap of altcoins (excluding BTC and ETH) to global net liquidity. Liquidity had steadily increased from 09/2023 to the start of the year. Crypto appears to peak 3 months after liquidity rolled over. If the relationship is somewhat consistent and June was the low for 2024, we could expect a low in crypto within the next few weeks. Equities are likely to follow with a move in the same direction.
High Yield Rate Spread
Recovery for equities is supported by the reversal in trend for high yield rate spread.
Seasonality
Last on my list of market health and outlook is seasonality. Overall conditions support an uptrend, but we are entering one of the weakest seasonal periods of the year. The S&P tends to do well the first few days of September. That’s when we start to see some financial media suggest that September might not be an issue. The final quarterly corporate tax payment is in mid September and a seasonal drawdown occurs in close proximity.
The effect seems increasingly pronounced in recent years.
Looking at seasonality by presidential cycle has shown October to be weaker than September. This is less pronounced during elections with an incumbent running.
From a weekly perspective, the last week of September has the strongest record for ending lower and is tied for worst drawdown, ending an average -0.7% lower.
While I don’t want to front run seasonality, the history here is very strong and I will patiently look for opportunities in September and October.
What about rate cuts?
It’s been over a year since our last rate increase. I see comments all over about what will do well and what won’t after a rate cut. The financial media suggests that they’ll be beneficial. There are a few bears screaming that bearish things. What does history tell us?
Charlie Bilello posted this a few weeks ago. Note that the difference in performance after the first cut varies when that cut comes during a recession. Those times also saw the larger 50bps cut.
Visualizing with the chart below we see that there is brief volatility when the rate policy stance changes. Sustained and steeper returns most commonly begin within a few months of a hiking or cutting cycle ending. Market outcomes during rate cutting cycles vary the most. This is probably the biggest takeaway as we consider risk exposure and sensitivity to technical warnings.
Hiking start (light red) end (red)
Cutting start (light green) end (green)
Recessions (blue)
Here are a population of large companies in each sector and how they fared after the first rate cut in the last 6 cycles. The first chart shows the 1, 3, and 6 month performance. The second shows 12, 18, and 24 months.
The bottom row is the combines performance relative to the S&P. The two numbers on the lower right of each chart are the average performance when the cut comes at the beginning of a recession versus non-recession.
This history suggests that an area of value occurs within 1-3 months of the first cut. It also suggests that safety and income sectors like utilities, REITs, and energy did not fare as well.
This population for this analysis is very small and has high probability of being skewed by company specific performance. I wanted to start with an observation of sector diversified portfolios with companies that spanned the last six monetary policy regimes. The next iteration of this research will use larger populations by sector. This will also be imperfect as the number of publicly listed companies spanning all regimes is small for some sectors (which could also be insightful).
Here is a look at how my top holdings have fared after the first cut. The relative strength is weighted by portfolio allocation. This has me proactively taking profits on my COP and MPC positions and looking to close my short term XOM position. I recently exited OXY.
Feel free to message me if you’d like to see a version with your portfolio.
Earnings
Earnings calendar from Earnings Whispers. The most important on my radar is AVGO.
Individual charts and opportunities
Treasuries
Bond prices should increase as rates come down. Since the bond market prices in future rate expectations, we are more likely to correct further before continuation. A move below 95-96 will signal broader risk.
S&P
The background color of the middle indicator signals when we have a bullish RSI signal. The settings are specific to my process for each asset that I track. For the S&P this is generally signaled when the RSI is above 60 and lasts until it falls below 40.
Connie Browns composite index is overlayed. It is the 9 period momentum of RSI + the 3 period moving average of RSI. It has a 13 period and 33 period moving average with it. This indicator reached an extreme on 8/16. It has only been this high on 5 other occasions in the last 20 years.
Taking a measure of and arbitrary 6 months from each, all saw higher returns. Some were steady climbs and some had significant volatility and correction along the way.
2004: +1.5%, corrections prior to continuation.
2009: +19.8%, correction after followed by continuation.
2014: +6.5%, major correction prior to continuation.
2016: +9.8%, immediate and steady uptrend.
2023: +19.6%, immediate and steep uptrend.
2004
2009
2014
2016
2023
OIL
After failing to break higher in August, oil has been trapped between the green AVWAP from the covid low and the yellow 200SMA.
Gold has continued higher, suggesting that oil will continue to struggle. In combination with
A look at more energy companies 3, 6, 12 months after the first rate cut. This also has me reducing my seasonal play on MPC.
GOLD
I think that gold has room to run in the long-term, but it has just hit my forecast and seems to have stalled a bit. I’m locking in profit and selling 1/3 of my position.
This structure in the composite index warns of consolidation or a move lower.
BTC
BTC has been in a lengthy consolidation, faking us out in between the green AVWAP that traces back to the beginning of the recovery in 2023 and the red from all time high. If we see a little bump over the holiday weekend or in the early days of September, I will fade it for opportunities later in the month.
My price targets for accumulation haven’t changed.
Weekly chart with a Bollinger band and two stochastics with different lengths confirm what we see on the daily.
A weekly chart with the system that uses the KST (fancy rate of change) and Chaikin oscillator (combining volume and money flow) has 100% success rate BTC over the past 4-5 years and is still in bullish territory.
Note that I only consider systems with 100% success rate in the context of long-term position management. I generally do not prefer these for short-term opportunities because they have lower reward to risk ratios.
September is the worst performing month for BTC, suggesting that it is also the best month to buy.
From a weekly perspective, we are entering the week of the year with the worst average performance, closing negative 64% of the time with an average performance of -4.3%.
NVDA
Great earnings, but the market seems to have wanted more. Trend began accelerating on 1/8. Anchoring a green VWAP shows that sentiment from that point has been tested twice. We’ve just tested the red AVWAPs from the 7/11 move down and the 8/5 low.
The composite index and total return indicators suggest that a sideways consolidation is the best near term possibility, with a move lower as a worst case.
AVGO
AVGO has a strong earnings track record. The trend looks very similar, but we’ve had a more constructive response from the test of the AVWAPs from 7/11 and 8/5. The total return has also remained positive.
COST
COST is part of my seasonal playbook, due to its near perfect performance in the month of November.
It doesn’t tend to pull back as much in September. Taking a closer look at presidential cycle seasonality, it does well in September and has a less impressive November during election years.
The composite index suggests that we might see an opportunity to add in the next couple of weeks. Possibly in the 845-865 area.
The KST and Chaikin oscillator system has 100% success rate with COST over the past 4-5 years and is still in bullish territory.
TSN
This is not a company that I plan to hold long-term. It’s completed a lengthy basing patter with a number of fake outs. It’s just recovered its AVWAP from the 2022 high. We have a case for a couple of inverted head and shoulders reversal patterns.
It’s shown great momentum as it’s exited its base. The overhead targets align to measured ranges from the inverted head and shoulders patterns and Fibonacci confluence areas.
It’s had a history of strong performance toward the end of election years.
MCD
MCD has quietly done very well after falling out of favor.
Stochastic moving below 75 and returning to the upper limit is a sign of strength. The Coppock Curve suggests that the uptrend has sustained momentum.
MCD doesn’t seem to be hit as hard by September and October seasonality.
