The Stock Market is Due For a Breather

We launched our new firm, HX Research, on February 1 or about a month and a half ago. 

The first two pieces we published for this publication discussed our stock market outlook. 

The money-making strategies we share with our paid subscribers are not dependent on a particular stock market outlook. They will make money across the stock market cycle. 

Having a view of the type of market we most likely can expect, though, can help! 

At a minimum, it can make the money-making journey less stressful. 

We are not always right with our stock market view, but through time, we have been right a lot more than we have been wrong. We have a demonstrable track record to prove this… 

Our outlook that we shared six weeks ago was an optimistic one. 

We discussed how many intermediate-term technical indicators with powerful track records pointed to the stock market moving higher through year-end. We also discussed how the overall economic environment was good and stable enough to help this happen. 

Our only concern was the potential for small cracks to develop into big cracks. Think of it like a pebble that hits the windshield of your car. It starts small, but sometimes, it can get a lot bigger quickly. 

The pebbles that have hit our economy – inflation, rising interest rates, the “mini” banking crisis, and the global wars – so far have not resulted in the big crack, but they certainly have made plenty of little ones. 

So far, our prediction has worked out pretty well. 

Here is the performance of the major US stock indices since our launch on February 1… 

The Dow is lagging as component The Boeing Company (NYSE: BA) has been hit but the other ones are doing great.   

A +5% return in 6 weeks is a +55% annualized return! Does anyone think THAT is going to happen? Maybe… 

In the meantime, the positive intermediate-term indicators continue to pile up. We recently saw this one from one of our favorite analysts, Ryan Detrick of Carson Group… 

After we have seen this kind of rally across this period of time, the stock market was higher 95% of the time! The only exception being the crash of 1987. 

The average and median return from these levels were +13% and +12%, respectively. 

That isn't +55%, but it is pretty darn good and seems a lot more reasonable. Those returns from current levels would put the major stock market indices up about +20% for the entire year.   

This makes sense and fits with our views… 

Our problem isn't with what happens by year-end; it is with what happens next, across the next few weeks or likely months. 

We have written extensively about the number of very overbought stocks and how we would deal with them. Here is our most recent note on the subject here. 

However, we are starting to see some real cracks in the market narrative.   

We think nothing will change the year-end outcome, but certainly, a number of tailwinds have slowly been turning into headwinds. 

The media and the “smart” money keep telling us that interest rate cuts are coming and rates are decreasing. Here is the chart of the interest rate on the 10-year US government bond… 

These are down from where they were back in October, but the chart suggests that they want to grind higher. 

How about lower oil prices? Here is that chart… 

That looks like almost the same chart. Again, it is lower than it was back in the fall but grinding higher. 

Here is the chart for commodities across the board as measured by the Commodities Research Bureau… 

Same pattern. 

We have been writing about the large number of large capitalization stocks that are at severely overbought levels. The indices themselves look pretty extended. 

Now, we are adding many macroeconomic factors that are beginning to go the other way. 

Do we really think the stock market will likely go up +55% in a straight line? 

The +20% we discussed above seems much more likely, which means the market needs to SLOW DOWN. 

Do you think the market is due for a correction? Tell us more in the comments section below. 

We seldom see markets that have gone straight up slow down by going sideways. It is always more painful than that... 

How much does this matter to your portfolio? Maybe not at all. 

For many (most?) of you, though, we think that taking some profits on significant gains will make you feel better about riding out what comes next. You could even make some extra money off of it! 

Check out Enrique Abeyta’s conversation with Whitney Tilson on the HX Podcast.