A lot has happened in 2023, but AI and the wars in Ukraine and Gaza strip are the most impactful events to the world and financial markets.  Despite all the human sufferings from the two brutal wars, the U.S. stock market was not fazed and did a fabulous job in 2023.  The advent of AI in 2023 has inspired our imaginations about a future dominated by AI.  2023 is the starting point of AI and the re-shaping of world orders.  We would like to address these two items in this blog and map out our thinking about the stock market.

It is very hard to predict the future, but we can go back to history to find out where we are when compared to the past norms.  Once we have some confidence about where we are, we can act accordingly with some degree of confidence.  The best instruments to study history are the stock market charts as the charts captured how the market reacted to the historical events.

We looked at the S&P 500 historical charts and found three locations that worth mentioning:

In August 1982, the S&P 500 rose 35% in 9 weeks.  This turn was in response to winning the war against the 70’s super high inflation.

In March 2009, the S&P 500 rose 39.50% in 9 weeks.  This turn was in response to the Fed’s all in easy money policies to rescue the economy and stock market from the 2007-2009 financial crisis.

In March 2020, the S&P 500 rose 41.43% in 9 weeks.  This turn was in response to the Fed’s and fiscal super all in easy money policies to rescue the economy and stock market from the Covid-19 pandemic.

The similarities of the three bottoms are striking.  The magnitude of the rise out of these three bottoms in 9 weeks is once in a decade opportunity.  Why 9 weeks?  In our cycle analysis, 9-week is an important time count for a bull market.  Bear market’s rally normally doesn’t last more than 9 weeks.

The S&P 500 launched a great bull market from the low of August 1982 that lasted eight years.  The economy was firing all cylinders in the 80’s until the Gulf War recession in the early 90’s.

The S&P 500 launched an 11-year bull market from the low of March 2009.  With the zero interest rates lasted over a decade, the stock market and the economy were doing really well until the Covid-19 pandemic hit the world out of no where.

There was a great debate about the odds of recession in 2023 after the Fed raised Fed Funds Rate from 0.25-0.50% to 5.25-5.50% in 16 months (March 2022-July 2023).  Recession didn’t happen in 2023 and everyone was surprised by the strength of the economy and stock market resiliency.  Even two simultaneous international wars didn’t scare anyone in the U.S.  There is still a debate about the odds of recession in 2024 as no one knows the lag effects of the historic Fed’s aggressive rate hikes that could cause a recession.

But if you compare the March 2020 bottom to the previous two significant bottoms, namely the August 1982 and March 2009 bottoms, you could argue that the powerful launch from March 2020 low may have similar runways like the other two bottoms.  Therefore a bad recession may not happen until 8 years from 2020.

The DOW finished 2023 in a breakout position.  The DOW opened at 33148.90, made a low at 31429.82, made a high at 37778.85 and closed at 37689.54 in 2023.  It closed 1.99% over 2022 high.  Also it closed to the top of the yearly trading range.  The S&P 500 and NASDAQ each made an inside yearly bar, meaning the S&P 500 and NASDAQ didn’t made a new low or new high in 2023.  An inside bar normally means indecision.  So we are have a breakout in the DOW, but indecision with the S&P 500 and NASDAQ.

Below is the explanation from Martin Armstrong about why the DOW is breaking out.

“The DOW is the indicator of international capital movement.  In contrast, the S&P 500 tends to reflect domestic institutional investors and the NASDAQ Composite tracks retail investors.  The prospect of war are understood among our major institutional clients, and we are witnessing capital inflows from both Asia and Europe, topped off by the Middle East.  You can see that the DOW has made new highs and will close above last year’s high.  However, when we look at the S&P 500, we have tested the 2022 high, but the market has yet to break through to new territory.  The NASDAQ, with all the AI crazy, has been an inside trading year after the knee-jerk low of 2022.”

“WAR is weighing heavily on the minds of many.  International money is seeking safe haven in the DOW.”

“The DOW is at extreme overbought position suggesting there is at least some reduction in the upward momentum.  We do not see any sustainable major crash ahead and in fact we expect to see a major high by 2032.”

It appears that geopolitical tensions are good for the U.S.. It’s sad but it’s the truth.  The U.S. sells more weapons, and money from the unstable and war torn countries will flow into the U.S. seeking safe haven.

Taiwan will hold election on January 13, 2024.  If the DPP wins the election, the prospect of war is increasing.  The market will have a knee-jerk reaction to the election and the dip should be bought.

Netscape browser was launched in 1995 and 1995 was the start of the 2000 DOTCOM bubble.  OpenAI was launched in 2023, will OpenAI lead us to a bubble in 5 years?

The Internet was invented on January 1, 1983.  Add 50 years to 1983, it will lead us to the year of 2033.  1929 bubble was the result of a 50-year run of the previous innovation wave.  AI probably is the final innovation to finish the 50-year run that will definitely produce a bubble bigger than the DOTCOM before all is done.  So the AI bubble could last 9 years, double the length of the Internet bubble.

It will have many twists and turns, but the 50-year wave is in the most exciting final leg.  Combining the geopolitical tensions with the most impactful technology AI in the coming 8-9 years, there will be a lot of opportunities to make a lot of money in the stock market.

We are optimistic about the big picture of the stock market.  We truly are living in an exciting time.

Below is the S&P 500 weekly chart.

It is 9 weeks into the current weekly cycle that started at the end of October 2023.  It is meeting the 4800 resistance.  The S&P 500 all time high is 4818.62.  The market could attempt to reach the all time high in January 2024 before retreating.  It is very likely we will get a dip sometime in February or a re-test of the February low to finish the current weekly cycle that started in October 2023.

The Q1 2024 dip should be bought.  Forget about the recession forecast.  The powerful combination of AI and war will push the recession further down the road.  A recession is delayed, but not denied.