Will the major indexes which are made of the magnificent 7 stocks catch down with the under performing small cap stocks to force the Fed to pivot in early 2024 due to the troubles in the economy?  Or will the small cap stocks catch up with the major indexes due to a strong economy that can afford the higher interest rates for longer?  These two questions have troubled many market participants.  We have been thinking about the resolution of an extremely bifurcated market too.

The mega tech companies have dominated the entire tech space since the 2008-2009 financial crisis bottom.  There were a bitcoin bubble and a small/mid cap/SPAC growth stocks bubble soon after the Fed implemented Covid-19 related extreme easy money policy.  The subsequent historic aggressive Fed rate hikes definitely destroyed the bubble areas in the stock market.  The major indexes suffered a mild bear market in 2022 and has recovered almost all the losses so far.  Everyone was surprised at the strength of the economy that absorbed the historic interest rate hikes like nothing has happened.  The strength in the major indexes reflects parts of the economy that truly are not hurt by the higher interest rates.  The cash on the mega tech companies’ balance sheets actually generate much bigger interest income due to the higher rates.  The only time when the mega tech companies will suffer is a full blown recession when the consumer stops spending.

Black Friday generated $9.8 billion in U.S. online sales, according to Adobe Analytics, up 7.5% from a year ago.  The consumer is not showing any signs of slowing down based on this Black Friday online sales data.  The employment situation is still strong.  We can’t help but wonder the possibility of a prolonged rate cycle.  In other words, the Fed might be able to hold the higher rates much longer than the market anticipates.  Right now, the market is projecting that the Fed will start to cut interest rates in Q1 2024.  If the employment situation remains strong and the Fed doesn’t cut rates in Q1 2024 as the market anticipates, the bifurcation in the stock market will continue in 2024.  The resolution of a bifurcated market is further delayed.

There is a strong possibility that the major indexes continue to march on in 2024 if the employment situation remains strong in 2024.  And the small cap stocks continue to under perform due to the higher interest rates environment.  We originally anticipate the 4-year cycle to bottom in Q1 2024.  Now with this possibility of a higher for longer interest rates environment, the stock market rally that started in October 2022 probably could last into Q3 2024.  By Q3 2024, this rally would be 2 full years.  If the market tops in Q3 2024 right before the election, the market probably will crash then to stop the Democrats from winning the election.  It is very difficult to forecast the market and it is dangerous to be rigid with forecast.  There will be a lot of forces influencing the market, especially during the election year.

2023 has been a very difficult year for the majority of the stocks and bonds too.  We got lucky with Palantir as we have a big holding of Palantir stock.  Palantir ticker PLTR got on the AI wave.  It out performed the general market by a very wide margin in 2023.  Its year to date gain is almost 200%.  We don’t see the reasons that Palantir could be a fake AI company.

Below is the S&P 500 weekly chart.

It is 4 weeks into the current weekly cycle.  There is nothing in the chart to call for a top for the current weekly cycle.  4600 is a psychological resistance, but nothing says that the market has to stop around the 4600 magic number.

It is a bull market, please stop trading on the short side.