Here's What Comes Next for Stocks

We nailed the 2023 bull market...

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I love it when a plan comes together.

Back on October 8th, I told you in this newsletter stocks were near a bottom. I then reiterated this call on October 29th saying the market was “testing you” with volatility.

This turned out to be correct, as the S&P 500 is +15% since I last proclaimed stocks were poised for a rally…

But as someone who’s been investing professionally for over a decade, this is one of the sharpest reversals I’ve seen.

That begs the question: is this rally for real?

Are We Near Peak Optimism?

I’m happy to have nailed 2023’s bull run… and made our Patreon Portfolio members lots of money.

The question now is if this rally has legs. One way to tell is to look at market “sentiment,” a concept we discuss a lot in this newsletter.

Remember that "peak pessimism" I talked about back in October? Well, the market seems to have taken that advice to heart as markets are now closer to “peak optimism.”

For instance, the same sentiment indicators I used to show we were near “peak pessimism” have now swung the other direction, including the CNN Fear & Greed Index.

I like to buy when things look bad and sell when things look good. And things are looking pretty good right now from a sentiment standpoint.

The VIX - or “fear index” - is at its lowest level since before the pandemic:

While the put-to-call ratio is heavily weighted in favor of calls, meaning investors are feeling optimistic:

While the sentiment pendulum has swung towards optimism, these indicators don’t imply we’re at “peak optimism” yet. But we’re getting closer.

That said, it’s not the only indicator I’m watching.

Seasonality is In Our Favor

I’ve said over and over this year that I view “seasonality” as stock market voodoo.

Seasonality is the attempt to predict stock market trends based on historical patterns associated with specific times of the year or recurring calendar events.

But when something is working, I lean into it. And seasonality has worked great in 2023 as the S&P 500 continues to track the Presidential Election Cycle almost perfectly:

If this trend continues as I expect, we should see a furious rally into the end of the year (if you want to see how I’m positioning to profit from this, click here).

That said, the S&P 500 and other major indexes are “overbought” on the 14-day relative strength index:

This is usually when you see markets take a “breather.” While I do expect a rally into the end of the year, I wouldn’t be surprised to see a quiet market this week.

But there’s one more factor I’m watching.

Buy the Rumor, Sell the News

Stocks have rallied over the last month for a few reasons.

Going into the year stocks were priced for a looming recession after the Federal Reserve had hiked interest rates to their highest level in a decade. But since that recession never materialized, stocks have now re-priced to assume “no recession” and “lower rates.”

But now everyone assumes we’ll have “no recession” in 2024. I’ve been saying this all year, which is why my portfolio is +35% as I sniffed this out before the crowd.

Now that the crowd agrees with me, I have less conviction on this call:

That’s not to say I think we’ll fall into recession (there are few signs pointing to that).

But I don’t think it will unfold as many expect, which could be a headwind for stocks in 2024.

Heavy is the Head that Wears the Crown

Our 2023 investment journey has been nothing short of remarkable.

While market sentiment may be leaning towards optimism and seasonality may hint at a year-end rally, the terrain ahead remains unpredictable. While I'm delighted to have navigated this year successfully and rewarded our Patreon Portfolio members, we must remain vigilant as we step into 2024.

As we close the chapter on 2023, let's keep our eyes open and our portfolios resilient, ready to face whatever challenges and opportunities the new year may bring.

Stay safe out there,

Robert