Before we get started, I want to welcome the +19 subscribers who signed up for the Let’s Analyze newsletter in the last week! If you want to join our community, make sure to sign up here:
The stock market bears are real quiet these days.
But some have no shame despite completely missing the 2023 bull market.
For instance, I see a few prominent bears still trumpeting the idea that the US economy is in bad shape. They repeat tired phrases like the average American is living “paycheck to paycheck” and that all US economic data is fake.
Yet, they tend to ignore headlines like this showing credit scores are at all-time highs…
…or that consumer spending - which represents 70% of the US economy - is also still surging:
Or my personal favorite: the US housing market is about to collapse…. even though mortgage delinquencies at all-time lows:
But as an analyst and investor, I know there are times to be bullish and times to be bearish. And today I’ll show you three indicators I’m watching to see if it’s time to stay bullish or shift my thinking.
Indicator #1: Market Sentiment
Back on October 22, I reiterated my call that the bottom for stocks was in.
And I hope you heeded this advice, as the Nasdaq index is up nearly +10% since:
Part of the reason for my optimistic outlook was investors were near “peak pessimism. And as I’ve learned throughout my 10+ years as a professional investor, the market typically bottom near these sentiment lows.
There are many ways to measure market sentiment. But I’d say the easiest one is simply looking at the CNN Fear & Greed Index. This indicator uses seven key sentiment indicators to gauge the stock market’s movements and tell whether stocks are fairly priced.
In short, the model embraces the theory that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.
And back in October, the index looked like this:
Levels of “extreme fear” like this are typically the best time to buy - which is why I was buying aggressively during this period - while the opposite is also true.
After the latest +10% rally for stocks, the Fear & Greed index is back into “greed” territory…
…meaning there could still be near-term upside, but the “easy money” has been made.
Indicator #2: The US Dollar
Back on August 13th, I told you the fate of the bull market would come down to what happens with the US dollar.
A falling or “weakening” of the US dollar relative to other currencies is good for stocks for a few reasons.
One, a weaker dollar makes stuff the US sells abroad cheaper for other countries. That means more sales for US businesses, which can juice corporate revenues and earnings.
A weaker dollar also gives commodities a boost—think oil, copper, and gold. Plus, multinational corporations like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) get a boost from a weaker dollar. That’s because it makes their overseas profits look even better when converted back to US greenbacks.
This weakening of the US dollar relative to other global currencies helped fuel the US bull market in the first half of the year. Then once the dollar started to strengthen over the summer, we saw a pullback in stocks:
But it looks like the US dollar may have peaked. Falling US government bond yields due to lower-than-expected US government spending has catalyzed a weakening of both yields and the US dollar:
I am going to go on record now and say US government bond yields have peaked for this cycle. If that turns out to be correct, the weakening US dollar and US bond yields should act as a tailwind for stocks going into 2024.
Indicator #3: The Federal Reserve
The US government bond market has been in its worst bear market since the 1700s:
The collapse in the US bond market is due to high inflation, ballooning national debt, and the Federal Reserve rapid interest rate hikes.
But it looks like at least two of those factors have been resolved. While I don’t expect prices to fall back (i.e. deflation) to pre-pandemic levels any time soon, prices have stopped rising over the last year:
That means the Federal Reserve is almost certainly finished raising interest rates. While we’ve assumed that the “inflation narrative is dead” for over a year, the market now believes it too, and even expects interest rate cuts as early as Mat 1st.
In fact, the market is pricing in 100 basis points in cuts in 2024:
If the Fed deviates from this path, we could see a pullback in stocks. But for now it seems both the Fed and the market are on the same page.
Tune Out the Noise
Listening to permabears like Robert Kiyosaki, Michael Burry, or the bevy of bearish-only Twitter / X accounts is poison for your mind and your portfolio.
These people are gaming you for clicks and do not have your best interest in mind.
I’m not saying you should never be bearish. But having a long-term “bullish bias” is supported by over a hundred years of investing data.
And while it sometimes to remain optimistic, just know I’m always here to bring a level-headed outlook for the markets.
Stay safe out there,
Robert