Healthy Digestion
The blue-chip S&P 500 bounced off the 50-day moving average (DMA) last week, indicating strong support. The tech-heavy NASDAQ remained above its 21-DMA, which is a constructive sign, providing additional support for market cap-weighted indexes. Both major indexes are trading above the low from the December 18 Fed-driven dip, signaling overall market health. However, the equally weighted indexes (showing weaker breadth) are trading below their 50-DMA. We prefer more stocks to participate in the rally (stronger breadth), but we must work with what we have.
Since the election, the market has been in rally mode, with stocks positioning themselves in anticipation of the new Trump era starting on January 20, 2025. The leaders have already been identified, and many are consolidating gains (resting sideways) building new bases while shaking out weaker holders. Charities receiving appreciated stocks (with significant tax deductions) might sell leading stocks on the same day, leading to forced selling. I expect more tax-related selling in early January to lock in gains and defer taxes. So far, the charts haven’t shown compelling reasons to reduce exposure significantly. However, with only two more trading days left in 2024, I will allow the charts to determine how much exposure we should maintain.
Bottom Line: The major indexes are undergoing a period of healthy digestion, with the leaders performing well. It may be time to pull out the weeds (sell underperformers) and let the flowers grow (hold the leaders). The market could be positioned for a “buy the rumor” (November 5) and “sell the news” (January 20) scenario. If the market drops following the Trump Inauguration on January 20, we’ll follow the charts and take the necessary actions to invest for another day. Wishing you all a Happy, Healthy, and Prosperous New Year! Grace and Peace to Everyone!
The grace of God has appeared, bringing salvation to all people. Titus 2:11