Always Buy on Tay-Tay’s B-Day, Okay?

By TradeSmith Research Team

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An epic Wednesday rally with a strange correlation | The Fed’s punchbowl is back | An inflation nothingburger | A stock-picker’s market in 2024 | Follow the Big Money to stay ahead…

Don’t worry, that will probably be my most cringe-inducing subject line of the year. Well, no promises — there’s still two weeks to go.

What a week to cap off. Stocks positively soared after the Fed’s press conference.

The Dow Jones Industrial Average rose 1.4% to set a record high on Wednesday, the first major index to do so since the beginning of the bear market in January 2022.

The tech-heavy Nasdaq notched its all-time high the following morning. The S&P 500, as I write, looks like it shouldn’t be too late to the party. Long-term Treasury yields continued their slide, with the 10-year slipping nearly 5%, and 2-year Treasuries nearly 7%.

All this is to say, the market is looking mighty bullish. But as always, we won’t take that at face value.

Let’s pick apart the last week in markets…

First, let’s address that subject line

Editor-in-Chief Luis Hernandez shared an incredible study with me Wednesday morning, which should get all of us even more excited for the back half of December.

Courtesy of Mike Zaccardi, CFA, CMT on Twitter:

First, the study.

Mike shows that over the past 71 years, the traditional “Santa Claus” rally doesn’t happen all December long. Aptly, it comes most strongly during the back half of the month, with the returns on today, the 15th being about flat on average… but rising steadily to more than 1.5% before New Year’s Day.

This should excite us tremendously. Stocks have already risen 2.5% this month. If another 1.5% rally is in store, that means a stocking full of record highs to enjoy.

Keep this in mind as we carry on through the finale of 2023. Especially with this momentum at our backs, you can’t be faulted for holding a shamelessly bullish bias.

A funnier side note to tie it all together is that Dec. 13, when Mike posted this, was Taylor Swift’s birthday. With the rip-roaring rally we got that day, “always buy on Tay-Tay’s birthday” may just become a new market adage.

We’ll have to check in next year to see if lightning strikes twice.

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On Wednesday, Jerome Powell punched a code into a wall safe and pulled out…

The proverbial quantitative easing punchbowl, overflowing with the financial equivalent of bourbon-spiked eggnog.

It was the third Federal Open Market Committee meeting where rates held firm at the target range of 5.25% to 5%. No big news there.

The real goodies were in the Fed’s so-called “dot plot” — which shows where Fed officials expect the federal funds rate to be over time.

Here’s the newest quarterly plot from the FOMC:

This chart shows that all but two party-pooper Fed officials see the federal funds rate going down by the end of next year. Most of them see the Federal funds between 4.25% and 5% by the end of 2024. One’s even eyeing a range of 3.75% to 4%. That means we should expect at least two, but probably three 25-basis-point rate cuts next year.

Going out to 2025, most of the Fed thinks rates should be under 4%. In 2026 and beyond, consensus is we’ll get back under 3%.

The entire story of the bear market that started in 2022 has been higher interest rates weighing on growing companies. Borrowing expenses went up, so belts had to tighten. That sent share prices tumbling down.

Fears of recession only added to the bearishness. And thus far, while a recession does appear likely eventually, given history, we still haven’t seen one.

That’s two hefty loads of ammunition for the bulls.

As we’ve been covering here continually in TradeSmith Daily, rate cuts are likely to be a boon for stocks in general, and small-cap stocks in particular. You’ll want to position accordingly for that potentially fast-approaching reality.

Granted, Powell did leave open the possibility of further rate hikes should inflation stubbornly persist. Speaking of that…

Not much surprise in the CPI

The inflation number was, mercifully, another “nothingburger” this month. For the most part, anyway.

The year-over-year Consumer Price Index numbers came in at expectations: 4% on the “core” measure, which strips out energy and food, and 3.1% overall. Energy prices fell, due to a continued slide in oil prices. Food elevated a little less than expected, and shelter costs remained the bane of every prospective homebuyer’s existence.

What wasn’t expected was a small, but not totally insignificant monthly rise of 0.1%. Inflation remains stubbornly lukewarm — there’s that word again, “stubborn” – and decidedly not at the Fed’s 2% target.

The Fed has said time and again that the inflation fight will be long and not a straight shot down. There will be, to paraphrase, bumps in the road. This month’s report seems like one of those bumps, and probably nothing so big as to derail the bullish train off its tracks.

Don’t settle for buying “the market” in 2024

So, we have quite a few bullish tailwinds at our back. How best to take advantage of them?

For your active account outside your 401(k), you want to be buying the best stocks — especially small-cap stocks — and not broad index ETFs to make the most of the rally that’s coming.

Never forget that this is a market of stocks, not a stock market. The performance of individual companies is what charts the market’s overall path. And the best stocks contribute the most to the overall market’s gains.

This year, it was the Magnificent 7 stocks. Next year, it could be something entirely different.

Think of it like a football draft. Teams don’t pick a hundred players at a time, assuming some patches of high quality among them. They pick just a few exceptional individuals who they think can make a big and immediate impact on the team’s success.

You should think of your portfolio the same way. The only stocks that belong there are the ones of sublime quality. The stocks with sterling fundamentals, positive forward outlook, bullish charts, and ideally a cheap valuation.

We talked about these types of stocks Wednesday, by way of our Trinity screener (by the way, you can access that screener at any time through our free-to-use-for-now TradeSmith Analytics dashboard.)

The right Trinity stocks in the right sector could make a huge difference in your wealth next year. Look to that dashboard often.

And speaking of Trinity Stocks… our resident stock-picking expert Jason Bodner agrees on one of them, but came to it in an entirely different way.

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Trinity Stock Williams-Sonoma (WSM) was on Jason’s watchlist…

If you made the smart decision to join Jason’s Dark Pools Summit pre-event VIP list, you already know this. And hopefully, you learned about the 11 other stocks that he flagged as buys before the watchlist went away.

And if you joined Jason for the Dark Pools Summit itself, you heard about his proprietary technique for spotting hidden money flows into the market’s highest-potential stocks.

Williams-Sonoma (WSM), with its Business Quality Score of 99, cheap price-to-earnings ratio of 13.67, and uptrend that’s taken it 73% higher since May, is a hallmark of this potential.

It also landed right in the sweet spot of Jason’s Quantum Edge score — giving it two strong buy signals at once.

Jason’s Dark Pools strategy is one of a kind. I’ve seen tons of different approaches to buying stocks — technical, fundamental, seasonal — but nothing quite like Jason’s unique method for finding the biggest money on Wall Street, and simply buying the stocks where he sees that money flow.

Institutional money flow is a powerful force that few get to see and experience firsthand. Jason did, and now he’s taken to sharing that experience with everyday investors.

As a TradeSmith Platinum subscriber, you have full access to everything Jason has to offer with his Dark Pools strategy through your Quantum Edge Pro subscription. Check out the two brand-new special reports he unveiled during Wednesday’s presentation right here.

To your health and wealth,

Michael Salvatore
Michael Salvatore
Editor, TradeSmith Daily