I’ve always liked to look at certain points during a bull market or bear market where the character of the market could change based on key fundamental news. We were at one of those points on Wednesday as 2 o’clock approached. The Fed was about to deliver their latest policy statement and traders were on pins and needles. Questions were swirling about what the Fed might say, and do, given the February Core CPI and Core PPI numbers that were reported higher than expected. The Fed already has squashed the bulls once recently, when they shot down the possibility of a March 2024 rate cut after expectations were building for exactly that. There were still the 3 rate cuts supposed to occur in 2024, but the Fed told us that higher rates would remain a bit longer.

Most traders are not blessed with great patience. Things could have turned ugly this past Wednesday at 2pm ET if the Fed decided to wait even longer to lower rates, possibly cutting the expected number of rate cuts from 3 down to some lower number. And what might happen if the Fed did an “about face” and said something that might indicate they’d have to reconsider hiking again? After all, this Fed hasn’t exactly been consistent in its discussion about interest rates.

Well, a lot of that anxiety came to an end on Wednesday as the Fed stuck to its previous guidance, despite the higher inflation reports the week prior. The stock market NEVER performs well when uncertainty is rising, but it generally does quite well when that anxiety is diminished. So at the moment the Fed indicated that nothing had really changed in their view, the stock market screamed higher, with the small cap IWM quickly testing overhead price resistance:

This was the chart I sent to EB members in my Daily Market Report on Thursday. Small caps received the news it was looking for and reacted according – to the upside. But the closing breakout never occurred on Thursday and that false breakout led to some profit taking on Friday. It’ll be interesting to see where small caps head this week. Since 1987, the annualized return for the IWM over the next 7 days is 41.20%, more than 4 times its average annual return. This tells us that history suggests a strong week ahead for small caps. But nothing is more important than the combination of price and volume. Before we grow overly excited about IWM’s prospects, we need to clear candle body price resistance, currently at 208.21.

Major Index and Sector Rotation

With this new information (basically the same as the old), and with inflation fears subsiding further, where did the money go from Wednesday 2pm ET through Friday’s close? Shouldn’t we be interested in what the big Wall Street firms were doing with their money after this fundamental announcement? Well, this is what the big boys were favoring after the announcement.

Major Indices

NASDAQ 100 (QQQ): +1.74%Russell 2000 (IWM): +1.73%S&P 400 Mid Cap (MDY): +1.55%S&P 500 Large Cap (SPY): +1.11%Dow Jones (DIA): +0.92%

Sectors

Industrials (XLI): +1.49%Communication Services (XLC): +1.46%Technology (XLK): +1.34%Consumer Discretionary (XLY): +0.84%Energy (XLE): +0.74%Financials (XLF): +0.73%Health Care (XLV): +0.48%Materials (XLB): +0.42%Real Estate (XLRE): +0.16%Utilities (XLU): +0.05%Consumer Staples: -0.08%

Clearly, money rotated and benefited “risk on” areas of the stock market, which is secular bull market behavior. Aggressive sectors led by a wide margin over defensive sectors. Money also returned to growth as most growth vs. value ratios turned higher after Wednesday 2pm ET as well.

Industry Group Rotation

We now know that money rotated in bullish fashion and to more growth-oriented areas, though industrials’ leadership and the S&P 500’s break to yet another all-time high after the Fed announcement is further evidence of wide participation in this latest advance. And with small caps right up there with the NASDAQ 100, all those breadth arguments can be tossed right out of the window.

Here’s what we should take away from industry group performance after the Fed meeting:

Semiconductors ($DJUSSC) was #1 among ALL industry groups – not too shockingThe Top 10 industry group performers belonged to either technology (XLK), consumer discretionary (XLY), or industrials (XLI)Heavy construction ($DJUSHV) had broken out a few weeks ago and the Fed announcement saw momentum increase significantly within this groupTrucking ($DJUSTK) bounced off 50-day SMA support and is poised to break further into all-time high territory, a very bullish development for transportation stocks ($TRAN) in generalGold mining ($DJUSPM) and mining ($DJUSMG) both saw bullish initial reactions, but then gave back most of those gains by Friday

Big Loser

In my mind, it’s once again gold ($GOLD). I think many traders believed that falling rates ahead would trigger a drop in the U.S. Dollar (UUP). Not gonna happen. Any weakness in the dollar of late has been triggered by potential erosion by inflation. The Fed essentially said that inflation isn’t a problem, despite the higher CPI and PPI readings recently. Our economy remains quite resilient and unemployment remains low, especially compared to foreign economies. That’s why the UUP is strong. Another breakout in the UUP could be at hand:

I know many keep pointing to the recent breakout in GLD, but I want to OUTPERFORM the S&P 500 and the above chart shows you that, outside of a few short-term pops to the upside (blue-dotted directional lines), the overall RELATIVE performance line is going down, down, down in a very big way. No thank you.

A Rapidly-Improving Heavy Construction Small Cap Stock

I was focusing on the heavy construction area ($DJUSHV) this weekend, because of its recent strength and then the surge after last Wednesday’s Fed meeting and policy statement. There are a number of stocks that caught my attention, but one in particular that I believe has a LOT more upside given its current technical outlook. I’ll be sending it out to our FREE EB Digest subscriber community before the market opens tomorrow morning. If you’re not already a subscriber, you can CLICK HERE to sign up with your name and email address. There is no credit card required and you may unsubscribe at any time!

Happy trading!

Tom

U2 is one of my favorite bands and I can’t help but think of their song, “With or Without You”, when I look at an S&P 500 chart. This secular bull market is waiting for no one. You’re either in it or you’re not. There’s nothing wrong with being a bit cautious from time to time, but remaining on the bearish side of the ledger or, worse yet, shorting stocks? In my opinion, it’s financial suicide. As money rotates into value-oriented stocks, there are fewer and fewer names not participating in this bull market. Trying to find stocks that will go down seems insane to me when the overwhelming majority keep trucking higher.

What Should We Expect From The Economy?

If you look at economically-sensitive areas, I find most charts very encouraging, starting with home construction ($DJUSHB). The DJUSHB was our best-performing industry group last week. Check out its performance both short-term and long-term:

DJUSHB – daily

Since breaking out in late-November, the DJUSHB has been very strong on both an absolute and relative basis (blue directional lines). But check out those blue circles in late-December. That was when the 10-year treasury yield ($TNX) hit its lowest level just beneath 3.80%. We saw the TNX climb 57 basis points after that and it’s STILL 44 basis points higher. Yet the DJUSHB has been pushing higher on an absolute and relative basis with a much higher TNX. That tells me that the big Wall Street firms believe rates will be heading lower later in 2024 and into 2025.

DJUSHB – weekly

The massive move to the upside, again both on an absolute and relative basis, screams to me that the direction of annual INFLATION had more to do with DJUSHB performance than the direction of the TNX. Once the annual Core CPI rate printed that double top and rolled over, Wall Street could not have cared less about what the Fed (or CNBC) was saying. Lower inflation meant a MUCH BETTER environment for interest-rate sensitive areas.

If we look at transportation stocks ($TRAN), it wasn’t quite so clear. Trucking ($DJUSTK) was very similar to home construction, mostly rising recently, but it’s been a more difficult ride on the railroads ($DJUSRR). Check out these two 10-year weekly charts:

Trucking ($DJUSTK)

Railroads ($DJUSRR)

Trucking is bullish and helping to lead stock prices higher. Railroads? Not so much. It’s worthwhile noting, however, that railroads appear to be printing the right side of a bullish cup with handle continuation pattern. What we need to see from this group is an ultimate breakout of this pattern above 3800 and a turn higher in the relative strength panel, clearing the 0.72 relative resistance level.

The Usual Suspects

Semiconductors ($DJUSSC), software ($DJUSSW), and internet ($DJUSNS) stocks have provided steady market leadership since early 2023, but growth had fallen out of favor the past few weeks to a couple months, depending on which chart you look at. The internet group, though, rallied to a make a breakout to an all-time high, despite the fact that its relative strength line isn’t also at an all-time high:

Weekly Market Recap

Key signals are telling me to ride this bull higher! I discuss a few of those signals and more than a dozen individual stocks showing tremendous strength in this week’s episode of EB Weekly Market Recap. CLICK HERE to watch the video and please leave me comments. It’ll also help me if you could hit that “Like” button and subscribe to our channel in order to be notified when I post a video.

Thanks so much!

Happy trading!

Tom

The 200-day SMA is perhaps the most widely used long-term moving average. As its name implies, it is a simple indicator that chartists can use for trend-following and momentum strategies. For trend-following, we just need to know where prices stand relative to the 200-day SMA. For momentum, we need to measure the distance between price and the 200-day SMA. Let’s look at examples from two Nasdaq 100 stocks.

The first chart shows Apple (AAPL) with the 200-day SMA in red and the 5-day SMA in green. I also like to smooth closing prices with a 5-day SMA to reduce whipsaws (bad signals). The blue circle on the chart shows a whipsaw in late October. “Reduce” is the key word here because we can not fully eliminate whipsaws. The red circle shows the 5-day SMA breaking decisively below the 200-day SMA in late February. AAPL is in a downtrend and not being considered for our dual-momentum strategies.

The indicator window shows the percentage distance between the 5-day SMA and 200-day SMA. This indicator can further filter signals and reduce whipsaws by adding a bullish threshold at +1% and a bearish threshold at -1%. An uptrend signals when the 5-day is more than 1% above the 200-day and a downtrend signals when the 5-day is more than 1% below the 200-day. This little filter would have avoided the whipsaws in late October and mid March (red circles).

Chartists can also use Percent above MA (5,200) to quantify the strength of the trend. AAPL was still in an uptrend in early November, but the 5-day was only 5% above the 200-day SMA on November 9th (green line). Keep this number in mind as we move to the second chart, Broadcom (AVGO). The chart below shows AVGO triggering bullish in December 2022 as the 5-day SMA was more than 1% above the 200-day SMA (green circles). Note that this indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP.

The green line marks November 9th and the 5-day SMA was 18% above its 200-day SMA on this date. This means it was much stronger than AAPL, which was only 5% above its 200-day. AVGO clearly won the momentum contest in early November. The stock was also breaking out to new highs in early November (red line). AVGO remains one of the leaders in the Nasdaq 100 because its 5-day SMA is almost 30% above its 200-day SMA. Chartists trading momentum strategies would still be focused on AVGO because it is in an uptrend and leading. This is the essence of dual-momentum.

TrendInvestorPro offers momentum-rotation strategies that trade stocks in the Nasdaq 100 and S&P 500. These strategies are fully systematic and trade on a weekly basis. Rankings and signals are posted every Saturday morning for subscribers. Click here to see performance metrics and learn more.

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