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Currently, the stock market is at an interesting crossroads. As investors patiently wait for the outcome of the debt ceiling negotiations from Washington, the U.S. Federal Reserve Meeting Wednesday, and the fallout from the banking crisis, there is a lot to digest. To make matters more confusing, the different equity indexes are diverging from each other in the widest margin seen in years. For example, the tech-heavy Nasdaq 100 Index ETF ((QQQ - Free Report) ) is higher by an impressive 26% year-to-date while the Russell 2000 Index ETF ((IWM - Free Report) ) is higher by a measly 1% (albeit it’s had to deal with a regional banking crisis).
From an investor perspective it can seem like a daunting task to try to account for and factor into a strategy monetary policy changes, macro-economic factors, political negotiations, geopolitics, and more. I have found that the best way to overcome this confusion is to factor in historical stats, precedent, and above all, listen to what the price and volume action is telling us. With that in mind, I will break down the bear and bull case for the stock market at this point in time.
Bear Case:
Bearish Divergence: The Relative Strength Index (RSI) measures the momentum of a particular instrument.Presently,The RSI of the S&P 500 Index ETF ((SPY - Free Report) ) is showing a bearish divergence. Bearish divergences occur when the price of an asset makes new highs while momentum does not – an indication that momentum may be lagging.
Image Source: Zacks Investment Research
“Sell the News” Potential: Wall Street tends to be a discounting device – it prices in highly anticipated events ahead of time. Is the recent melt up in stocks an indication that a resolution is likely to be found for the current debt ceiling negotiations? If so, savvy investors may use the burst of enthusiasm to take some profits. In October of 2022, stocks did the exact opposite and bought the news after the highly anticipated “highest in 40 years” inflation data hit news wires. Consequently, the S&P 500 had a bullish divergence at the time.
Image Source: Zacks Investment Research
Pictured: RSI divergences can be key inflection points.
QQQ Distance from the 50-day Moving Average: Moving averages can be a valuable tool for investors because it can provide a reference point for trends. Uptrends tend to take two steps higher and one step lower, or three steps higher and two steps back. For investors, the best course of action is to avoid chasing trends and instead look to buy into support. Historically, when an index gets extended by 7% or more above the 50-day moving average it needs to correct – either through time or price. Late last week the QQQ index reached extended levels of 7% above the 50-day moving average.
Image Source: Zacks Investment Research
Sentiment: The CNN Fear and Greed Index measures sentiment through seven fear and greed indicators. The index is currently flashing the “greediest” levels since February – just before the market endured a multi-week correction.
Image Source: Zacks Investment Research
Bull Case:
Trends Tend to Persist: As Larry Hite once said, “the trend is your friend until the end when it bends”. Presently, QQQ and SPY are in classic uptrends. Price is above a rising 200-day moving average, the moving averages are stacked (faster moving averages above slower ones), and they are making higher highs and lower lows. Rarely does it pay to fight the predominant trend for more than a short-term trade.
Image Source: Zacks Investment Research
Innovation to Drive Future Earnings and Cut Costs: Many value investors are complaining about big tech valuations in companies such as Microsoft (MSFT) (trades at 34x) and Nvidia ((NVDA - Free Report) ) (94x). Though the valuations are undoubtedly lofty, using P/E as a timing device is a fool’s errand – especially in bull markets. Firstly, the internet bubble and many bull markets over the years provide investors with proof that p/e ratio can extend to nosebleed levels and stay there for months or years before a stock tops.
Image Source: Zacks Investment Research
Secondly, the AI revolution may boost earnings to a point where innovative companies like NVDA can “grow into them”. Even with this year’s monstrous move in stocks like Alphabet ((GOOGL - Free Report) ), MSFT, and NVDA, context is important. After the 2022 tech correction, all three stocks remain well below their highs, while growth is expected to catapult higher. For example, NVDA (which reports earnings Wednesday) is expected to announce record earnings in early 2024. Meanwhile, the share price is well below the all-time high price of $346 achieved in late 2021.
Image Source: Zacks Investment Research
History Tells Us that Price Bottoms Well Before Earnings: The past three major bear markets (2020 Covid Crash, 2008 Global Financial Crisis, & 2000 Internet Bubble) saw price bottom before earnings. Will it happen once again?
Image Source: Zacks Investment Research
Stabilization Outside of Tech: A key argument in many bearish theses is that mega-cap tech stocks such as Apple ((AAPL - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) are propping up the entire equity market.
Potential for Broader Participation: Monday, IWM shot higher by 1.22%, outperforming the other major indices. Beaten down ARK Innovation ETF ((ARKK - Free Report) ) leapt higher by nearly 5%. Troubled auto retailed Carvana ((CVNA - Free Report) ) has more than doubled off lows. All the above point to evidence that weaker areas of the market may be finally stabilizing.
Putting it All Together
The bull and bear arguments laid out above suggest that the uptrend may need to pause and correct through time or price in the short-term. While there is little evidence to go short, new longs should be avoided until we get a pullback. Longer term, the evidence points to a bull market recovery.
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Bulls vs. Bears - Who Will Emerge Victorious?
Currently, the stock market is at an interesting crossroads. As investors patiently wait for the outcome of the debt ceiling negotiations from Washington, the U.S. Federal Reserve Meeting Wednesday, and the fallout from the banking crisis, there is a lot to digest. To make matters more confusing, the different equity indexes are diverging from each other in the widest margin seen in years. For example, the tech-heavy Nasdaq 100 Index ETF ((QQQ - Free Report) ) is higher by an impressive 26% year-to-date while the Russell 2000 Index ETF ((IWM - Free Report) ) is higher by a measly 1% (albeit it’s had to deal with a regional banking crisis).
From an investor perspective it can seem like a daunting task to try to account for and factor into a strategy monetary policy changes, macro-economic factors, political negotiations, geopolitics, and more. I have found that the best way to overcome this confusion is to factor in historical stats, precedent, and above all, listen to what the price and volume action is telling us. With that in mind, I will break down the bear and bull case for the stock market at this point in time.
Bear Case:
Bearish Divergence: The Relative Strength Index (RSI) measures the momentum of a particular instrument.Presently,The RSI of the S&P 500 Index ETF ((SPY - Free Report) ) is showing a bearish divergence. Bearish divergences occur when the price of an asset makes new highs while momentum does not – an indication that momentum may be lagging.
Image Source: Zacks Investment Research
“Sell the News” Potential: Wall Street tends to be a discounting device – it prices in highly anticipated events ahead of time. Is the recent melt up in stocks an indication that a resolution is likely to be found for the current debt ceiling negotiations? If so, savvy investors may use the burst of enthusiasm to take some profits. In October of 2022, stocks did the exact opposite and bought the news after the highly anticipated “highest in 40 years” inflation data hit news wires. Consequently, the S&P 500 had a bullish divergence at the time.
Image Source: Zacks Investment Research
Pictured: RSI divergences can be key inflection points.
QQQ Distance from the 50-day Moving Average: Moving averages can be a valuable tool for investors because it can provide a reference point for trends. Uptrends tend to take two steps higher and one step lower, or three steps higher and two steps back. For investors, the best course of action is to avoid chasing trends and instead look to buy into support. Historically, when an index gets extended by 7% or more above the 50-day moving average it needs to correct – either through time or price. Late last week the QQQ index reached extended levels of 7% above the 50-day moving average.
Image Source: Zacks Investment Research
Sentiment: The CNN Fear and Greed Index measures sentiment through seven fear and greed indicators. The index is currently flashing the “greediest” levels since February – just before the market endured a multi-week correction.
Image Source: Zacks Investment Research
Bull Case:
Trends Tend to Persist: As Larry Hite once said, “the trend is your friend until the end when it bends”. Presently, QQQ and SPY are in classic uptrends. Price is above a rising 200-day moving average, the moving averages are stacked (faster moving averages above slower ones), and they are making higher highs and lower lows. Rarely does it pay to fight the predominant trend for more than a short-term trade.
Image Source: Zacks Investment Research
Innovation to Drive Future Earnings and Cut Costs: Many value investors are complaining about big tech valuations in companies such as Microsoft (MSFT) (trades at 34x) and Nvidia ((NVDA - Free Report) ) (94x). Though the valuations are undoubtedly lofty, using P/E as a timing device is a fool’s errand – especially in bull markets. Firstly, the internet bubble and many bull markets over the years provide investors with proof that p/e ratio can extend to nosebleed levels and stay there for months or years before a stock tops.
Image Source: Zacks Investment Research
Secondly, the AI revolution may boost earnings to a point where innovative companies like NVDA can “grow into them”. Even with this year’s monstrous move in stocks like Alphabet ((GOOGL - Free Report) ), MSFT, and NVDA, context is important. After the 2022 tech correction, all three stocks remain well below their highs, while growth is expected to catapult higher. For example, NVDA (which reports earnings Wednesday) is expected to announce record earnings in early 2024. Meanwhile, the share price is well below the all-time high price of $346 achieved in late 2021.
Image Source: Zacks Investment Research
History Tells Us that Price Bottoms Well Before Earnings: The past three major bear markets (2020 Covid Crash, 2008 Global Financial Crisis, & 2000 Internet Bubble) saw price bottom before earnings. Will it happen once again?
Image Source: Zacks Investment Research
Stabilization Outside of Tech: A key argument in many bearish theses is that mega-cap tech stocks such as Apple ((AAPL - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) are propping up the entire equity market.
Potential for Broader Participation: Monday, IWM shot higher by 1.22%, outperforming the other major indices. Beaten down ARK Innovation ETF ((ARKK - Free Report) ) leapt higher by nearly 5%. Troubled auto retailed Carvana ((CVNA - Free Report) ) has more than doubled off lows. All the above point to evidence that weaker areas of the market may be finally stabilizing.
Putting it All Together
The bull and bear arguments laid out above suggest that the uptrend may need to pause and correct through time or price in the short-term. While there is little evidence to go short, new longs should be avoided until we get a pullback. Longer term, the evidence points to a bull market recovery.