2023 wrapped up with some modest losses on Friday. It was a year that had something for everyone with the both the bulls and bears having their moments. The Dow lost 20-points on the last trading day of the year, which was basically flat. The broader S&P 500 and Nasdaq had larger percentage losses and the small caps took the biggest hit and that may have been a result of profit taking after a near 12% gain for the month. The I-fund managed to hold onto a slight gains and bonds pulled back as yields moved up in the final day of trading in 2023.
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As we talked about, profit taking was bound to start hitting and because of the 2-day trading settlement rule, waiting until Thursday and Friday last week allowed the capital gains on those trades to roll over into the 2024 tax year. We could see more of that early this week, but taxes are not usually the main catalyst for stocks in early January.
There are no shortages arguments for why the stock market can't do well again in 2024. There are also good arguments why stocks may not do well this year. The short term outlook is just as fuzzy being that the indices are certainly stretched to the upside and overbought, but this is the start of a new year and often the first week of the new year sets the tone for the full year, so if stocks are going to well in 2024, it's possible that investors will be ignoring the overbought conditions and continue to move higher to set that tone.
The January Barometer suggests that, how goes January, so goes the year. January has a bullish bias, and that makes sense since the stock market is up most years. But often when there is a down year in the stock market (S&P 500), it starts with a negative January. Not always, and it seems like the more people became aware of this tendency, the less effective it has become, but January of 2022 was negative and January of 2023 was positive, both inline with their full year returns.
Chart provided courtesy of www.sentimentrader.com
The bears' camp is expecting a meaningful slowdown in the economy this year driven by the spike in interest rates in 2023, but that is something that most expected by late 2023 and it never really manifested.
We still have an inverted 2-year / 10-year Treasury yield curve, and it has been that way for a year and a half now. The data and trends over the decades suggested that this was a roadmap to a recession, but again we haven't seen any serious signs of that yet.
Another potential roadblock for the stock market this year is that we have seen expectations for interest rate cuts this rise dramatically recently despite the Fed giving no such indications that they will be aggressively cutting. The bond market seems to be on that dovish page, however we will have to wait another month before the Fed's next FOMC meeting so January will be more about speculation.
The current Fed Funds target interest rate range is 5.25% - 5.50%, but as you can see in this chart, the majority (52%) of interest rate traders are already pricing in four 0.25% rate cuts down to a Fed Funds target rate of 4.25% - 4.50% by their July meeting, and another 43% expect 3 or 5 cuts. What happens to the stock market if they do not cut that much?
As far as timing the market goes, 2024 was another year of the trend. In 2022 the market trended lower and in 2023 it reversed and trended higher and there were smaller trends within those larger trends. But it was the excessively steep angles of incline that caught me off guard last year as they did not seem sustainable, yet they kept going. The rally in the middle of 2023 was extreme enough, but the November - December rally was off the charts steep. As you'll see in a short-term chart of the S&P 500 down below, the most recent trading channel actually broke down on Friday.
The above chart appears to be screaming for a pullback, but it's never as easy as it appears and, as I just mentioned, if 2024 is going to be a good year for stocks, there's an historical reason to believe that stocks could be up this month.
The weekly chart is equally extended but a breakout above 4800 would likely set up another leg higher at some point. Momentum type indicators suggest this bullish trend can go on for a while, but expect some kind of meaningful pullback at some point to reset investor sentiment of their current extreme bullish levels.
We will get the December Jobs Report on Friday and estimates are looking for a gain of approximately 162,000 new jobs and an unemployment rate of 3.8%.
TSP Talk is celebrating its 20th anniversary this month as I uploaded the first TSP Talk Market Commentary back in January of 2004. The Way Back Machine has our January 15, 2004 daily commentary as our earliest commentary, although I'm quite sure that wasn't the first one. Take a look if you want a peak back in time...
TSP Talk - Thrift Savings Plan Strategies
The S&P 500 (C-fund) was down modestly on Friday, but the loss did push it below that long-term ascending trading channel. The angle of that incline was not sustainable but now the question is whether this is just going to just widen the rising channel, or break the trend. The PMO momentum indicator on the bottom has it extended but flattening out, if not rolling over. The opens gaps below are legendary in my eyes. I have seen a gap stay open for a while, but a series of gaps staying open this long is quite unique. To fill just the first open gap from the current level would take a decline of 7%.
DWCPF (S-fund) has been ripping higher for two months at an amazing pace. It has an open gap in a more reasonable reachable area of 1900. However it will have to break its ascending channel in the process, which would change the dynamics of the current rally, whether that is a change in trend or just a slower pace for the rally.
EFA (I-fund) has been benefiting from the weakness in the dollar since the Fed has been indicating that interest rate hikes are likely over. The Fed continues to reduce their balance sheet which should keep the dollar somewhat buoyant, and if they continue to reduce it this year, at some point the lack of liquidity could hurt the stock market, and particularly the I-fund because of it would firm up the dollar. But it hasn't yet.
BND (bonds / F-fund) has helped trigger the rally in stocks over the last two months as yields are falling as if the economy is in a recession. I don't know how low yields can and will go, but I think it's safe to say that they have peaked, which means the F-fund has likely hit a low. But it has come a long way in a short amount and like the stock market, the bond market is likely due for a pause or pullback.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"]
[TD]
[/TD]
[TD="width: 338, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
As we talked about, profit taking was bound to start hitting and because of the 2-day trading settlement rule, waiting until Thursday and Friday last week allowed the capital gains on those trades to roll over into the 2024 tax year. We could see more of that early this week, but taxes are not usually the main catalyst for stocks in early January.
There are no shortages arguments for why the stock market can't do well again in 2024. There are also good arguments why stocks may not do well this year. The short term outlook is just as fuzzy being that the indices are certainly stretched to the upside and overbought, but this is the start of a new year and often the first week of the new year sets the tone for the full year, so if stocks are going to well in 2024, it's possible that investors will be ignoring the overbought conditions and continue to move higher to set that tone.
The January Barometer suggests that, how goes January, so goes the year. January has a bullish bias, and that makes sense since the stock market is up most years. But often when there is a down year in the stock market (S&P 500), it starts with a negative January. Not always, and it seems like the more people became aware of this tendency, the less effective it has become, but January of 2022 was negative and January of 2023 was positive, both inline with their full year returns.
Chart provided courtesy of www.sentimentrader.com
The bears' camp is expecting a meaningful slowdown in the economy this year driven by the spike in interest rates in 2023, but that is something that most expected by late 2023 and it never really manifested.
We still have an inverted 2-year / 10-year Treasury yield curve, and it has been that way for a year and a half now. The data and trends over the decades suggested that this was a roadmap to a recession, but again we haven't seen any serious signs of that yet.
Another potential roadblock for the stock market this year is that we have seen expectations for interest rate cuts this rise dramatically recently despite the Fed giving no such indications that they will be aggressively cutting. The bond market seems to be on that dovish page, however we will have to wait another month before the Fed's next FOMC meeting so January will be more about speculation.
The current Fed Funds target interest rate range is 5.25% - 5.50%, but as you can see in this chart, the majority (52%) of interest rate traders are already pricing in four 0.25% rate cuts down to a Fed Funds target rate of 4.25% - 4.50% by their July meeting, and another 43% expect 3 or 5 cuts. What happens to the stock market if they do not cut that much?
As far as timing the market goes, 2024 was another year of the trend. In 2022 the market trended lower and in 2023 it reversed and trended higher and there were smaller trends within those larger trends. But it was the excessively steep angles of incline that caught me off guard last year as they did not seem sustainable, yet they kept going. The rally in the middle of 2023 was extreme enough, but the November - December rally was off the charts steep. As you'll see in a short-term chart of the S&P 500 down below, the most recent trading channel actually broke down on Friday.
The above chart appears to be screaming for a pullback, but it's never as easy as it appears and, as I just mentioned, if 2024 is going to be a good year for stocks, there's an historical reason to believe that stocks could be up this month.
The weekly chart is equally extended but a breakout above 4800 would likely set up another leg higher at some point. Momentum type indicators suggest this bullish trend can go on for a while, but expect some kind of meaningful pullback at some point to reset investor sentiment of their current extreme bullish levels.
We will get the December Jobs Report on Friday and estimates are looking for a gain of approximately 162,000 new jobs and an unemployment rate of 3.8%.
TSP Talk is celebrating its 20th anniversary this month as I uploaded the first TSP Talk Market Commentary back in January of 2004. The Way Back Machine has our January 15, 2004 daily commentary as our earliest commentary, although I'm quite sure that wasn't the first one. Take a look if you want a peak back in time...
TSP Talk - Thrift Savings Plan Strategies
The S&P 500 (C-fund) was down modestly on Friday, but the loss did push it below that long-term ascending trading channel. The angle of that incline was not sustainable but now the question is whether this is just going to just widen the rising channel, or break the trend. The PMO momentum indicator on the bottom has it extended but flattening out, if not rolling over. The opens gaps below are legendary in my eyes. I have seen a gap stay open for a while, but a series of gaps staying open this long is quite unique. To fill just the first open gap from the current level would take a decline of 7%.
DWCPF (S-fund) has been ripping higher for two months at an amazing pace. It has an open gap in a more reasonable reachable area of 1900. However it will have to break its ascending channel in the process, which would change the dynamics of the current rally, whether that is a change in trend or just a slower pace for the rally.
EFA (I-fund) has been benefiting from the weakness in the dollar since the Fed has been indicating that interest rate hikes are likely over. The Fed continues to reduce their balance sheet which should keep the dollar somewhat buoyant, and if they continue to reduce it this year, at some point the lack of liquidity could hurt the stock market, and particularly the I-fund because of it would firm up the dollar. But it hasn't yet.
BND (bonds / F-fund) has helped trigger the rally in stocks over the last two months as yields are falling as if the economy is in a recession. I don't know how low yields can and will go, but I think it's safe to say that they have peaked, which means the F-fund has likely hit a low. But it has come a long way in a short amount and like the stock market, the bond market is likely due for a pause or pullback.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
