Investors were greeted with a brutal bout of selling as 2024 unfolded this week. The stocks that had gained the most last year were obvious targets. Is this the end of the rally or is this simply a minor bump in the road?

 

The Santa Rally reversed, and the Grinch stomped on investors' hopes for further gains. The NASDAQ led stocks lower with the Magnificent Seven taking it on the chin. For those who believe in the idea that the first five trading days of January forecast the direction of the market for January and for the year overall, the market’s performance does not fill one with confidence.

 

It is nail-biting time for the bulls. The first three trading days of the year were negative. That has happened 12 times since 1950. Only three times has the market managed to turn positive by day 5. To me, the jury is out until the market closes on Jan. 8.    

 

As for the disappointment that Santa did not come to Wall Street this year, let's look at history. Over the last 80 years, there have been 15 times where we have had negative results over the last five days of December and the first two days of the following January. Out of those 15 times, the market managed to deliver positive returns 10 times with a median return of 3 percent.

 

From a technical point of view, the sell-off did not even dent the bullish cast of the markets. As I have written over the last few weeks, the markets were overheated and each day we gained that condition worsened. The good news is that the selling has relieved that overbought condition without seriously impacting the upward momentum of the markets.

 

Even as the markets declined, some of the areas that lagged the markets during 2023 moved higher. The health-care sector, for example, saw some great gains, as did energy stocks and utilities. Those areas underperformed the markets drastically last year.

 

While most readers are focused on stocks, the main drivers of the last two months' gains have been the steep decline in bond yields and the declining dollar. Both areas have reversed this week with the benchmark Ten-Year U.S. Treasury bond seeing its yield break above 4 percent this week on the upside. And as we know, bond yields up usually mean stocks are down. Assets that are on the other side of the dollar (precious metals, materials, crypto, emerging markets) were hurt as well.

 

I am sure one of the reasons this occurred was a reverse in sentiment by bond traders. The betting on future interest rate cuts in 2024 had gotten out of hand, in my opinion. Some were betting up to six rate cuts in the year beginning in March. That to me was a case of irrational exuberance. Just because the Fed may have finished raising interest rates does not automatically mean the central bank will start cutting rates. In other words, the Fed's "higher for longer" is still the name of the game.

 

The economic news certainly did not support the need for the Fed to cut interest rates anytime soon. The economy is growing. Unemployment is not rising. Instead, the jobs market, per Friday's non-farm payrolls, surprised economists on the upside. The economy added 216,000 jobs, which was a big beat compared to the forecasts of 175,000 jobs.

 

On a different subject, the U.S. government was also responsible for some big price movements in two sectors this week:  crypto and pot stocks. The Securities and Exchange Commission (SEC) has until Jan. 10 to rule on a proposal by Ark Invest and 21Shares. Both firms are applying to issue a bitcoin spot currency exchange-traded fund.  Many other big brokers and asset managers such as Fidelity, Invesco, BlackRock, Van Eck, Wisdomtree, and more have done the same.

 

The SEC could reject the proposed application outright, delay it, or approve it. It looks to be a binary event that should send Bitcoin substantially higher (or lower) depending on the outcome. The betting ranges from 90 percent approval to zero chance.

 

On Wednesday, an October 2023 letter from the Drug Enforcement Administration (DEA) to a member of Congress, was revealed. It made clear that the agency had "the final authority to schedule, reschedule, or deschedule" drugs under the Controlled Substances Act (CSA). The DEA also told lawmakers it is "now conducting its review" of whether to soften federal regulation of marijuana under the CSA. The news instantly sent marijuana stocks higher.

 

Last year, I wrote that the Department of Health and Human Services had asked the DEA to review marijuana's Schedule 1 status and to reduce it to a Schedule III substance. That request triggered a huge run in the sector. This was largely due to the differential in federal taxes that would occur if the DEA granted marijuana Schedule III status. The industry would immediately experience a large decline in taxes leading to a big jump in profitability.

 

At the time, Industry experts believed that the DEA review would only happen in the second half of the year and closer to the elections. I advised readers not to chase the stocks, but rather wait until investor attentions were focused elsewhere. That happened. Hopefully, you were able to pick up some stocks or an ETF on the cheap.  

 

Fortunately, some of that fluff has now come out of the markets, which to me is a positive development. I think we now have a chance to see new highs over the next week or two. However, that does not mean that we are up, up, and away into the rest of the first quarter. I am still expecting a more savage decline sometime soon that could begin as early as late January, or early February.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

As we close out 2023, stocks continue to inch higher. The traditional rally encompassing the last five days after Christmas into the first two days of the New Year is on track. Next week, trading should resume and with it a possible new high in the markets. 

 

Low volume, empty desks, and a focus on buying up the laggards of 2023 describe the week's trading action. Macroeconomic news was scarce. In that vacuum, stocks were at the mercy of proprietary traders and the ODTE speculators. The financial media kept investors busy by publishing a forest full of 2024 forecasts by brokers and money managers.

 

Overall, the 2024 S&P 500 Index targets range from 4,200 to 5,500. Given that over a long period, the S&P 500 has delivered around 10.13 percent yearly returns since 1957, and 9.19 percent over the last 150 years. As such, forecasts that mimic those returns should be ignored.

 

Those forecasts say to me that the authors have no idea where the market is going. As such, they have just taken the historical average gain as their forecast. Very few are bearish for 2024.

 

The current consensus is that the Fed will cut interest rates at least three times next year. Inflation is not coming back, and the U.S. will escape a recession. Interest rates will remain lower, but yields may bounce back up for a short time. The U.S. dollar will also continue to decline.

 

I am usually not one that agrees with consensus forecasts. I am also going to refrain from forecasting where the S&P 500 will end up 12 months from now. There are just too many factors that can change my outlook along the way. So instead, I will focus on the risks and rewards I see for the markets.

 

While I do think the markets will be higher than they are now by the end of next year, there will be some substantial pullbacks along the way. In January, for example, we could see a blow-off top that could see the S&P 500 index reach 4,900-5,000. That is the good news.

 

However, I am looking for a pullback after that. We could see a big bout of profit-taking beginning in the second half of January or early in February.

 

This consolidation should continue into April. Worries of slowing macroeconomic growth and falling employment will dampen investors' enthusiasm for stocks. This will be punctuated by doubts and uncertainty about whether the Fed will cut rates or simply continue to pause. In summary, the first half of 2024 will be volatile and trend to the downside.

 

There may be some areas that could withstand this malaise. I think that precious metals may be one of them. Europe may turn the economic corner providing some global growth. China could come back as well, in which case, materials might also do well. Overall, however, the first half is going to be bumpy.

 

In the second half, we face the 2024 elections. I expect the present administration, like every other administration, will pull out all the stops to goose the markets and the economy before the November elections.

 

Between the U.S. Treasury and the Federal Reserve Bank, I would expect to see a loosening of monetary policy and lower interest rates by April. This should ease financial conditions. If so, economic growth should rise, as will corporate profits and productivity. Inflation might remain sticky as a result but still trend downward below 3 percent, but still not reach the Fed's 2 percent target.

 

I do not expect another year of stellar performance by the Magnificent Seven. They will gain in price for sure, but I would expect the other 493 stocks of the S&P 500 to do better as will small-cap stocks, industrials, financials, and biotech.

 

That's it in a nutshell. I caution that my forecasts can change (and probably will) based on unforeseen circumstances. I wish you a wonderful 2024. Happy New Year.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

It has been a heck of a year for equities. Most investors should see double-digit gains when they open their January reports. Is the best yet to come?

 

Officially, the Santa Claus rally comprises the last five trading days in December, plus the first two trading days in January. If that tradition holds, we should see further gains from here. However, many worry that Santa came early and all we face into the new year is a downside.

 

They have reason to worry. We are already quite extended. Bullish sentiment is over the top. Bond yields have dropped so low in such a short period that many traders are looking for a rebound in yields. In addition, there seems to be an attempt by Fed officials to discourage investors from expecting the central bank to start cutting interest rates in March of next year.

 

Ever since the FOMC December meeting's pivot to a more dovish stance, yields have fallen dramatically, while stocks roared higher. The "higher for longer" message they have been spouting for months about interest rates, has been replaced by "too far, too fast" when assessing the gains in financial markets over the last few weeks.

 

In the latter half of this week, we did see some profit-taking, which was to be expected. After all, by Tuesday's finish, the Dow had registered its fifth record close in a row. Most indexes were up nine or ten consecutive days in a row. The record rally had pushed the S&P 500 Index within reach of its all-time high made in January 2022.

 

It is getting to the point that investors were expecting only up days and so were somewhat shocked by Wednesday's late-day sell-off. In the last hour and a half of trade, the markets took a sudden turn lower for no apparent reason.

 

The averages were all suddenly in free-fall with no news or event that could explain the decline. The Dow dropped more than 475 points, while the S&P 500 and NASDAQ declined more than 1.5 percent each. The small-cap Russel 2,000 lost the most at 1.89 percent. What happened?

 

Those readers who read my column last week — "Zero-Date Options Boost Market Risks" — have a leg up on how and why this sudden downdraft occurred. If you haven't read it, I urge you to do so.

 

ODTE is an acronym for zero-days-to-expiration options. An enormous amount of volume in the options market (over 60 percent) is in these one-day option bets on the direction of the market indexes. The ODTE market, in my opinion, has been transformed from a viable hedging strategy for professionals to something more akin to gambling on a horse race or buying a lottery ticket for many retail traders. The risk is enormous and given the right circumstances could impact financial markets drastically.

 

This week, we saw the risk involved when just a few bearish ODTE contracts triggered a mad rush for the exits. An army of option day traders (40 percent of ODTE traders are retail speculators), fearing a possible market sell-off, moved to one side of the boat at the same time. That created a cascading selling event that only stopped when the day was done, OTDE options expired, and the market closed. Overnight, without the pressure of bearish ODTE contracts, futures rebounded. By Thursday's opening, those same ODTE traders scrambled into bullish options bets once again.

 

As we head into the week between Christmas and New Year, most market participants will be taking off to celebrate the holidays. As a result, trading will be light and volumes quite low, which can set the stage for unexpected, and at times, wild gyrations in the markets. The OTDE options market can exacerbate that behavior.

 

There is a part of me that hopes we do see some further pullback in the days ahead. It would relieve some of the overbought conditions in the market. That would set us up next week for a further leg higher in markets, and possibly new highs into January. 

 

I urge investors to enjoy the gains because I fear this party will be coming to an end somewhere around the middle of January. At that point, expect to batten down the hatches, but more on that forecast next week. In the meantime, happy holidays to all and to all a good week.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The chairman of the Federal Reserve Bank signaled this week that the Fed's monetary tightening policy may be coming to an end. Investors reacted by lifting the main averages higher, building on a more than 10 percent rally since October.

 

The "Powell-ful Rally," is how some pundits explained the spike higher in the averages after Wednesday's FOMC meeting. The S&P 500 Index, already in an overbought condition, rallied 1.5 percent. Thursday and Friday, traders consolidated those gains by taking some minor profits.

 

While most of the Fed's policy statements remained the same, investors did see and hear enough to believe that the Fed is unlikely to hike interest rates further. The Federal Open Market Committee members did indicate they are expecting the inflation rate will continue to cool. At the same time, they did not expect a sharp rise in unemployment, although unemployment could rise in 2024 to more than 4 percent.

 

Even more important to investors, after reading the Fed's forecasts for next year (called the dot plot), the likelihood of at least three rate cuts next year is now on the table. Their forecast for the Personal Consumption Expenditures, (PCE), the Fed's main inflation gauge, is expected to drop from 3.2 percent this year to 2.4 percent in 2024. That is a big decline.

 

But what caught my attention was this statement by Powell during the Q&A session: "You ask about real rates…," he said, "And indeed, if you look at the projections, I think the expectation would be that the real rate is declining, as we move forward."

 

What is the real rate of interest? The definition is simple. The real rate of interest equals the Fed Funds interest rate minus the inflation rate (real rate=Fed funds rate-inflation). What happens if inflation gets softer, as the Fed projects, but the central bank doesn't cut interest rates, the real rate of interest would go up. The only way the real rate declines is if the Fed begins to cut interest rates fairly soon.

 

That was all the markets needed to launch higher. I would describe the rush into equities this week as panic buying. The knee-jerk fear of missing out on further gains has stretched the indices upward to the breaking point. However, it seems that the catch-up areas that I have recommended (precious metals, small caps, materials, industrials, and financials) are now taking center stage while the Magnificent Seven are lagging somewhat. I still think technology is a great place to be but the juice in this end-of-year rally is my catch-up trades.

 

The markets have gone almost straight up over the last two weeks, which has not given side-lined investors a chance to get in and buy the dips. However, we may see some downside in the coming week as we almost always get after a big run higher.

 

The question on many readers' minds is how far this rally can go. After all, The Twelve Days of Christmas are not even here, and yet we already have three rate cuts, two turtle doves, and… I will let readers fill in the rest.

 

I am sticking to my targets. As I wrote back in November, "I expect we will make new highs and continue to climb to as much as 3,800 or beyond on the S&P 500 Index. As such, I would use any pullbacks to add to positions both in technology as well as industrials, and the catch-up areas I highlighted."

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

In the coming week, there are three hurdles that investors need to confront. Inflation data, a bond auction, and an FOMC meeting.

 

Investors are now convinced that job growth is finally slowing, inflation is a thing of the past and that the Fed will begin cutting interest rates as early as the second quarter of 2024. As such, they expect next week's Consumer Price Index will show further declines in headline inflation. Despite the almost one percent decline in the U.S. Ten-year bond, the U.S. Treasury's 10- and 20-year bond auctions will go off without a hitch. And finally, since inflation is dead and jobs are falling in an election year, the Fed will have no choice but to cut interest rates before the presidential elections.

 

Now if that sounds a bit like a Goldilocks scenario, I wouldn't blame you. There have been hundreds of strategy reports that have said the same thing with colorful charts and graphs proving these points circulating Wall Street over the last month. Given that, and knowing how the stock market works, all these positive expectations have already been discounted by the stock market.

 

What this means to me, is that each of these events must deliver results that are much better than expectations to move markets higher. We get the CPI report on Dec. 12. On Dec. 13 during the FOMC meeting, we need to see Fed Chair Jerome Powell not only indicate no more rate hikes but hint at cutting rates. And finally, U.S. Treasury auctions must be snapped up as a real bargain.

 

If that does not happen, use the example of Friday's unemployment report for November as a tell. Non-farm payrolls were slightly stronger than investors expected. The unemployment rate ticked down to 3.7 percent from 3.9 percent in October. The U.S. economy added 199,000 jobs versus the 185,000 jobs expected. That was a mild miss, but the immediate reaction in the bond market was to see the prices of both the ten-year and thirty-year bonds drop by more than 1 percent, while the dollar strengthened by more than half a percent. In other words, both equities and bond yields are priced for perfection and there is little room for disappointments.

 

This week, the decline in bond yields, coupled with the weakness in the U.S. dollar, has provided a cushion for the equity markets. It has been encouraging that small-cap stocks have largely led the markets throughout the week, while the Mag Seven gang has taken a bit of a back seat.

 

I suspect that the small-cap universe will see even more gains in the weeks ahead as will other areas that have languished this past year. The biotech area has also outperformed this week, and that will also be a winner, especially next year.

 

Another asset that I like has now come back into range. Precious metals have pulled back. Gold, after hitting a record high, is consolidating. I am looking at roughly $2,000 an ounce. as a possible entry point for those who want to speculate. Silver is also consolidating. Crypto, on the other hand, is close to the year's high and may also need to take a pause and consolidate before moving higher. 

 

Energy is starting to look tempting. I think the sell-off may be overdone and we could see a bottom sometime this coming week. For the year ahead. I think technology (AI), industries, and financials should be at the top of your wish list of areas that look especially interesting to me.  As for the coming week, I am still expecting more consolidation before an upsurge in stocks to close out the year. Use any dips to add to positions.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.