Last week’s rally confirmed the 1/5/2024 low as the low of the second daily cycle bottom and also the half weekly cycle bottom.  The confluence of the two bottoms made the S&P 500 rally from the last six trading days a good one at 2.57% measured from low to high (1/5/24-1/12/24).  The DOW and S&P 500 both made a new high while the NASDAQ failed to do so.

On December 20, 2023 the market had a distribution day, meaning a sizable selling from institutions.  Comparing to the price on December 20, the market literally made no to a very small progress.  It is 11 weeks into the current weekly cycle and 5 days into the third daily cycle within the weekly cycle.  If the market turns down from here, it will form a double top.  The downside of selling the double top would be around 4572, that’s about 5% drop for the December 2023 high.

The market “wants” the Fed to start lowering interest rates in March Fed meeting.  Before the March 19-20 meeting, there is a Fed meeting at the end of January.  If the market smells that the Fed will not lower interest rates in March meeting, it would engineer a tantrum, a well orchestrated selloff in the stock market to force the Fed.  So the market could still trade sideways until the end of January, right before the Fed January meeting.

Regardless the Fed meeting schedule, it is 11 weeks into the weekly cycle.  It could well stretch another 2-3 weeks trading sideways before a tantrum.

Overall the market undertone is very bullish.  This period is analogous to the mid 90’s, right before the DOTCOM bubble took off.

The economy has so far defied the recession logic.  It was widely understood and anticipated for a recession to occur within 2-2.5 years from the first rate hike in March 2022.  By this March it would be two full years since the first rate hike.  The economy is slowing, but signs of recession are not visible.  The big banks just reported earnings and there were no skeletons in the closet per se.

In our opinion, the economy and market’s abilities to defy the recession logic were totally due to the amount of money in the system.  The Fed instituted an 11-year zero interest rate policy from 2009-2021.  The Fed and White House infused insane amount of money to fight Covid Pandemic.  So the recent historic aggressive interest rate hikes were absorbed well.  Apparently the economy can afford the current interest rates.

We went back to compare the March 2020 stock bottom to the bottoms in August 1982 and March 2009.  We realized that the magnitude of rise out of the March 2020 bottom could power the economy and stock market much longer than the common recession logic.  So we are no longer negative about the stock market.  We think the Q1 2024 dip is a buying opportunity.

Our Q1 2024 dip buying target is 5% below the December 2023 high.

Below is the S&P 500 daily chart.

The market looked tired by forming a potential double top.  We also looked at the ration chart (not shown here) XLY/XLP (consumer discretionary vs. consumer staple).  The XLY/XLP weekly chart has turned down while the S&P 500 still looks strong.

XLY/XLP ratio chart is a good measure of risk appetite.  When XLY/XLP turns down, it mean the market internals are rotating to risk off consumer staples.

The upside gain from the year-end rally is almost done.  It is just a matter of time for the rally to enter a 5% correction phase in February – March 2024.