MarketSmith powers the charts in this video.
Don’t fight the Fed, don’t fight the tape is an old trader’s saying that rings true now more than ever. It was coined in 1970 by a famed investor Martin Zweig to explain the strong correlation between Federal Reserve policy and the direction of the stock market. In his book “Winning on Wall Street’, he writes “The monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction”.
The Fed started this rally on November 1 by signaling an end to its rate hike cycle. The Fed added fuel to the fire last week by projecting 0.75bps rate cuts in 2024 and more in 2025 and 2026. Since early November, the S&P 500 is up seven weeks in a row – something not seen since 2017. The small-cap index, Russell 2k went from a 52-week low to a 52-week high in a record 33 days. The Nasdaq Composite is basically at all-time highs after being down 33% in 2022.
What’s next? Many stocks seem quite extended at the time and can use some form of consolidation to offer better risk-to-reward entries. This doesn’t necessarily mean that a break will happen if everyone is expecting it. It’ll happen if enough people decide to take profits or short and their supply overwhelms the demand of other market participants. The market is getting ready to celebrate new all-time highs before the end of the year, if even for a day. Small caps tend to outperform at the end and the beginning of the year, so the next few weeks might offer some intriguing opportunities in select highly-shorted stocks.
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