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An Investor Game Plan After a Historic Rally

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We are two months into 2024 and the year has already started with a bang. Despite the big rally from the October lows late in 2023, the bullish momentum in the stock market continues to drive stocks higher.

The rally has been fueled by two factors.

First, due to lower inflation rates, we have optimism that the Federal Reserve will start cutting interest rates multiple times starting this summer.

And second, we are seeing euphoria surrounding the artificial intelligence space.

This combination has helped the S&P run +25% and the Nasdaq surge +28% since the October lows.

So where do investors go from here after such a historic run?

Excitement builds after a rally like this and many investors get in trouble putting money to work at peaks. But rather than panic and hit the buy button, investors need to put together a rational game plan so they can maximize the potential that is to come in 2024.

Let’s discuss how this year is shaping up and map out what a game plan could look like for the rest of the year.

Bulls Off to a Great Start

The 2023 bull run was accomplished despite all the negativity surrounding higher interest rates, inflation and geopolitical events. Investors who were scared away by the fear narrative have now flipped in 2024 with a big case of FOMO (fear of missing out).

The S&P and the Nasdaq are both higher by about +8% already in 2024. And with that, there are plenty of individual stocks that have experienced huge moves over the past two months.

Just look how the top performers of the S&P 500 have performed versus the indexes since the start of the year:

1) NVDA +63%
2) META +40%
3) CTLT +31%
4) LLY +30%
5) TPR +27%

Image Source: TradingView

AI Leads the Way

The hottest sector in the stock market over the last year has been Artificial Intelligence (AI). This futuristic technology is fascinating to many, and whether we like it or not, it will change our lives.

My prediction for 2024 has been that the AI space will blossom into something like what we saw with cryptocurrency altcoins during the pandemic. This has yet to play out, but we are starting to see some companies see some explosive moves higher.

While everyone's eyes were on NVIDIA (NVDA), the small-cap name Super Micro Computer (SMCI) dwarfs the YTD return, up over +200% already in 2024.  

Image Source: TradingView

While those returns are very impressive, there are smaller companies that you may have never heard of that will prove their use case and the stock will double, triple, or even 10X. As more eyeballs focus on the space, we will continue to see a euphoria-like move in everything AI-related.

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Are Investors Chasing Returns?

The AI revolution is very exciting and there is plenty of money to be made. But investors need to stay rational and not get caught up in a FOMO-driven market.

Since October 30th, the S&P 500 has been higher 15 out of the last 17 weeks. That is only two weeks of red within a +25% move higher.

This type of rally is not a common occurrence, so I went back to look at how many times something similar has happened since I started trading back in 2005.

It has happened only three times!

The first time was the March lows in 2009 after the financial crisis. The bounce off the bottom posted a +40% move and higher 13 out of 15 weeks. A shorter number of green weeks, but a more intense move to the upside.

The second occurrence was the post-Trump election when the market slowly grinded upwards for a +14% gain in 17 weeks. Fourteen of those were green.

The third was the 2019 run-up to COVID-19, which had a very similar look to the current rally. 13 out of 15 green weeks, but only a move of +13%.

So, in my nearly 20 years of involvement in the markets, this magnitude of a stock rally has only happened three times before.

In two of the prior three times, the rally held and we saw much higher prices.

The third rally was ruined by an unprecedented event in COVID.

By understanding that, we must accept that the money flowing into this market is expecting higher prices.

To answer the question above, investors are certainly chasing returns. And while a short-term sell-off is warranted, a move lower will provide an opportunity into the end of the year.

No Recession, But There Are Still Risks

The calls for a recession in 2023 were overwhelming and it never worked out for the bears. And unlike 2022, a recession was not even close, with GDP for the third quarter coming in at 5.2%, the highest reading since Q4 of 2021.

Looking to the rest of 2024, many investors have accepted there will be no recession this year. While the consensus sees slowing growth, most forecasts expect positive GDP into the end of the year.

While a recession in the U.S. might be off the table, there are still risks that could bring back the bears.

Here are four risks that could cause the market to pullback 5-10%:

1. Inflation ticks back higher - A move in the CPI to the 4-5% range would spark a sell-off.

2. A hawkish Fed - If the economy gets too hot and the inflation data gets hot, the Fed will hold off on interest rate cuts, which would upset the markets.

3. Geopolitical concerns - Russia, Israel, the Red Sea, Taiwan. An escalation in any of these areas could bring fear back to the global markets.

4. Election uncertainty - With two older candidates, we could get a surprise before Americans head to the polls. With two incumbents running, a shake-up would cause uncertainty, which the market typically responds to in a negative way.

Investor 4-Step Game Plan

In the current atmosphere, investors are dealing with stocks at all-time highs with some potential risks ahead. Investors need to have a game plan.

Below is a four-step process to consider for success throughout the year.

1) Lighten Up for A Pullback

You will never go broke taking profits, and right now is a great time to take some chips off the table. As we discussed above, the historical rally is likely due for a pullback and investors should prepare for that.

One approach is to hedge. There are many ways to do this, whether it be through options, futures or inverse ETFs.

But the simple approach is to sell some stocks and raise cash so you have some fresh powder to put to work on the next dip.

My end-of-year S&P target is 5440, which is +6% above the current SPX price. Right now, many short-term treasury bills are paying over 5%, which is a risk-free return. So, it would make sense to raise some cash and park that money into these short-term instruments while you wait for a sell-off.

2) Look For Support on Any Sell Off

I see a pullback coming soon, but this support will come in quickly at important technical levels. Many investors have missed the move and they are looking for an entry point, so look for the following technical levels in the S&P:

• 50-day Moving Average: Currently 4865
• 50% Fibonacci Retracement: 4615
• 200-Day Moving Average: Currently 4510
• 61.8% Fibonacci Retracement: 4500

Investors should be nibbling at these technical levels on any sell-off, and if support is confirmed, they can fully allocate their cash into equities.

If a pullback to the 4500 level were to come, it would be a 13% drawdown, which is not out of the ordinary in volatile markets. A move down into the 4500-4650 would be my buy zone, with end-of-year targets remaining in the 5400 area.

3) Target the Early 2024 Winners

When a pullback starts, it is time to make a wish list. Make a note of the stocks you want to buy now and when we get a pullback scenario like we discussed above, it is time to pounce on those names.

Typically, the early winners in January continue higher into year's end, so tracking these winning stocks is important.

Of course, things can change for a company throughout the year, so make sure to utilize the Zacks Rank to verify that the stock you are watching has earnings strength behind it.

4) Watch the Fed

The tricky part this year will be the Fed and exactly when they will cut rates. When the pivot starts to happen, investors will not be able to get big returns on their cash and they will be incentivized to put money to work in risky assets.

According to the Investment Company Institute, there was $5.89 trillion in money market fund assets in December 2023. As rates go lower, these money market accounts become less lucrative in comparison to an S&P 500 index fund.

The market is now pricing in 100 bps of interest rate cuts by the end of 2024. This would set the Fed’s target rate at 4.25-4.50% versus the current 5.25-5.50%.

The first cut is expected this summer, with the market pricing in an 85% chance we see a cut by July.

How to Profit from What the Market is Telling Us Now

Investors who missed the gains in 2023 need to start being more optimistic as we move through 2024. While the recent move higher in stocks is ripe for a pullback, any dip in the market should be viewed as a buying opportunity into the end of next year.

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Thanks and good trading,

Jeremy Mullin
Zacks Stock Strategist

Jeremy Mullin is a stock strategist who combines the fundamental power of the Zacks Rank, technical analysis and computer driven trading to find the best trades. Discover all of his current recommendations in Zacks Commodity Innovators and Zacks Counterstrike.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.


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